Current Thoughts

Here are a few of our thoughts in the midst of a very turbulent time. First, it is important to recognize that what we are experiencing right now is probably equal to or greater in magnitude to anything that has happened in the history of our financial system. The mechanisms that were set in place after the great depression have protected the financial markets thus far but, make no mistake about it, these mechanisms are currently being severely tested.

At this time, it is yet to be seen if the Federal Reserve will be able to offset increasing systemic risk in the financial system by extending their charter to the protection of commercial banks from the counterparty risks of non-commercial bank financial entities, such as investment banks and large insurance companies. As we write this note, they have opted not to directly backstop the counterparties of Lehman Brothers in the way they protected the counterparties of Bear Stearns; a rather strange and oddly political call in our minds. Now, it is unknown if they will protect the counterparties of AIG, which is a potentially far more serious problem for virtually every large bank in both the United States and Europe. In our judgment, they must step up to this situation to avoid financial chaos, but their unwillingness to try and calm the markets seems odd to us. We can only assume that their own capacity may be in question.

Having said all of this, it’s worth repeating what the CFO of Goldman Sachs said in their conference call this morning: “In difficult times, nothing is ever as bad as it seems at the bottom and, in good times, nothing is ever as good as it seems at the top.”

With that in mind, we have left considerable cash on the sidelines to protect ourselves from downside and to take advantage of some rather extraordinary opportunities that we are currently seeing. Recently, our biotech, consumer staples, and medtech/pharma sectors have held up very well, offsetting some of the weakness in commodities, infrastructure, and energy, where many good values are being exposed. While we are well aware of the weakness in the economy, all of our holdings have significant value that will continue to rise over time. Under current circumstances, we may trim positions, where sensible in the near term, while keeping an eye toward investment opportunities that are developing.

Given the challenges of today, we find comfort and confidence in sticking to our conservative strategy and valuation process. It will guide us through these chaotic and volatile markets and provide significant returns to our investors over time.

We welcome your comments and questions.