Wall $treet Week with FORTUNE's Karen Gibbs recently sat down with money manager Wayne Tilson, known for his bearish stance, who has been buying stocks lately. Excerpts of their conversation will air on our April 8, 2005 program. Meanwhile, here are portions that won't be aired:

KAREN GIBBS: What is your scuttlebutt research saying on AIG? Is anybody there answering the telephone to speak to?

WHITNEY TILSON: Well, I don't think anyone in AIG, within AIG is talking to anybody, but we look for an information edge when we're investing, you know, certainly not inside information, but there are many legal ways that investors or anyone else can get unique insights into a company. The example I gave last time I was on the show was calling up a lot of Hardee's restaurants to find out about their new Thickburger menu, and we ended up making five or six times our money on the stock as a result of getting that information and investing on it.

In the case of AIG, the best we could do was my uncle was in the insurance business for decades, he competed against AIG, he knows many former executives there, and two of them were willing to talk to us off the record, but they were fairly senior executives not too, too long ago at the company. And basically what they told us about AIG is that it's an enormously powerful company, tremendous competitive advantages, a worldwide presence and a tremendous growth opportunity still, particularly internationally, and they were very clear that the sin that AIG committed here was some degree of earnings smoothing, but that the genuine earnings power of the business was always there and will likely always be there.

So the real concern to us is, our next line of questioning is, okay, if the balance sheet and the earnings are going to remain intact, how about the people there? This is a very execution-oriented business, and you had one of the great titans of American business, Hank Greenberg, who was forced out as a result of this. Could the company come apart having lost its leader? And the answer we got was pretty clearly no, that Greenberg to his credit built a very strong second tier of management.

And the only thing those people were worried about, the people we talked to, said is if the investigations uncover more dirt and the whole next layer of management, the next dozen people at the company were to somehow get forced out. At that point the company, there would be some risk there. The company could start to come apart. But we don't think that's likely. We think AIG will likely pay a big fine, Greenberg's out, and the rest of the management team and the company will be intact, and a year or two from now this company is probably going to be earning $5 or $6 a share and people buying it today in the low $50s will be well rewarded.

AIG is an inherently lumpy business. The insurance business, particularly things like property and casualty insurance, a big chunk of their business, a big hurricane comes along and they're going to take a big earnings hit that year, but over the cycle if they're disciplined underwriters they should make healthy profits. So we never believed AIG's profits were as smooth as they were made out to be for so many years, but Wall Street certainly rewarded it with very high earnings multiples. Now the truth has come out. The earnings never were as smooth as they were made out to be, and the stock has certainly paid a hefty consequence, and I think in part because people are worried that there's going to be more negative headlines in the next month or two and maybe it will turn out that AIG isn't all it's cracked up to be.

What has linked Berkshire Hathaway in with AIG is that a number of years ago AIG bought something called a finite reinsurance contract from Berkshire Hathaway that AIG apparently used to smooth its earnings. It treated it as insurance when in fact it appears, certainly what the regulators are investigating is is that it was in fact more like a loan, should have been accounted for as such, and in fact AIG admits that they misapplied it on their books. Now that has come back, and the regulators are now talking to Warren Buffett next week. He's cooperating fully. And finite reinsurance is a product that's been around for a lot of years. Berkshire Hathaway and many other insurance companies have sold it. It's a widely used product in the insurance industry. There's nothing inherently wrong with it, but occasionally some of the users can abuse it.

And our feeling is, you know, having studied Warren Buffett and throughout his career that he's probably the last person who would ever knowingly even come close to the line of accounting manipulation or helping other people manipulate their books, and so we think Berkshire Hathaway is likely to come out clean as a whistle on this, and that's another one of our favorite stocks today.

GIBBS: Well, now you are pretty much fully invested, so let's take a look at the broader market now. We've had a pretty good week this week, but we're still underwater for the major market averages so far for this year, thanks in part to higher interest rates and higher oil prices. What has turned you so bullish?

TILSON: Well, it's funny. We try not to get bullish or bearish on the market as a whole because we only own a concentrated portfolio of stocks, and our portfolio and when we're finding things to buy often doesn't correlate with what the general indices are doing. We, my partner and I spend every day reading annual reports and looking at the 52-week low list, looking for companies that are scandalized, and sometimes the fast food sector a couple of years ago emerges, and we find five investments in a very short period of time, and then five months go by, the cash piles up, and we find nothing.

So by happenstance our theme historically has been, we've bought out of favor, unknown companies often where there's no Wall Street coverage. We're hunting around the nooks and crannies of the market, because it's very hard to find inefficiencies in places where there are ten analysts covering a company. But every once in a while you find a gem just sitting there in plain sight, and in this case we found a number of blue chip companies, companies I consider to be among the 10 or 20 greatest companies in the entire world, that maybe they're not 50-cent dollars, maybe we're not trembling with greed, but there's a little bit of quivering with greed. So I'd be happy to tell you about some of them.

GIBBS: Yeah, what's making you quiver?

TILSON: Well, I'll give you an example of a theme, which is great companies, maybe the stocks are 20 percent or so undervalued, but where we think it's a very safe investment.

GIBBS: Now how do you measure value, undervalue, overvalue?

TILSON: Well, there's some science and a lot of art and a lot of experience, but the simple definition of value of any asset -- it could be an apartment building, a bond, a stock, a company, a private company, a public company -- is what are the future cash flows? And you just discount that back to the present. With a bond it's pretty straightforward. You know that the future cash flows are going to be, assuming the bond doesn't default. In the case of a company or a stock which represents ownership in a company, the future is uncertain, and that's why you can get vast price swings in a stock and real disagreements among investors as to what something is worth and they have different predictions about where a company is going to be in five years.

Where we're typically investing is is where something short term has happened to a business that's caused everyone to be pessimistic. They're investing while driving, it's like driving while looking through the rearview mirror, whereas of course sensibly you should be looking through the windshield. But of course the past is always known; the future is unknown. So a lot of people, you know, they have this bias where they look at the past projected into the future, and that can sometimes lead to mispricing.

GIBBS: Okay. How about some other companies that you are buying?

TILSON: Well, in the sort of big-cap arena, I've talked about AIG, I've talked about Berkshire Hathaway and Wal-Mart. Let me mention a couple of others. We've owned McDonald's for a couple of years. At one point it was well under a 50-cent dollar, today at about 31 and change. We think the stock's probably worth $40. So again a multi-year turnaround. We think we're about halfway through it, and we think investors are viewing this as a 5 to 10 percent a year earnings growth company. And we think they've fixed their U.S. operations. They have not yet fixed their European or Asian operations, and you could have another sort of step function increase in earnings over the next couple of years. So we still like that a lot.

We're generally fairly bearish on financial stocks as a whole and have some bearish bets in that sector. We think that the so-called carry trade, where short-term interest rates were so low that every financial institution in the world was borrowing short and lending long and making a huge spread, that spread is getting compressed fairly dramatically as the short-term interest rates are rising but the long-term interest rates aren't, so the spread is narrowing. So we think there are going to be plenty of unpleasant surprises in the financial sector just from the narrowing of that spread, not to mention the real possibility there could be some crisis, there's a good chance that there's a housing bubble in some areas anyway. American consumers are levered to the hilt like no consumers in the history of the world have ever been. So if bankruptcies start to rise, that could start to hurt these companies, but American Express has a pretty nice, they've got a travelers business, a travelers check business, they've got a very nice diversified worldwide business, so we think they're a pretty good bet in that sector.

GIBBS: And you've had an incredible record, beating the S&P again for the first quarter. And I understand that you've now opened two new mutual funds. Can you talk about that?

TILSON: Sure. It was very frustrating over the years. I've been writing publicly and been a bit of a public figure I guess, and occasionally there would be inquiries about investing with us, and when you run private investment partnerships as we do, you have only a certain number of slots for investors. You have to set fairly high investment minimums, it has to be a credited investor.

So the net of it was over six-plus years we turned away 99 percent of the investors who ever wanted to invest with us, and that was frustrating. So we like the private investment partnership business that we've been in for years, but we think the mutual fund business is a pretty good business. We think there's probably a little less competition in that business, and so we think we're just going to take the same good stock picking that we do in hunting for bargains and we're going to do that for our mutual funds as well.

GIBBS: Will it still be a million-dollar minimum?

TILSON: Oh, no. A $2,500 investment minimum. It's just for the average person and can invest via an IRA account or just regular taxable funds. We will soon have a ticker for the funds. You have to have $10 million before you can apply for one, so we'll hopefully be there soon and have one. And in the meantime, the only place you can get the information is directly from our web site at tilsonmutualfunds.com.