January 10, 2005
To Our Investors and Friends:
The performance of the stock market in 2004 may well be a preview of how we can expect markets to behave over the next several years. By long-term historical standards, the broader market represented by the S&P 500 performed well, with a return of 9%. The narrower Dow Jones Industrial Average returned only 3.5%, due largely to fallout from the pharmaceutical industry. Last year’s market factors, such as low interest rates, large deficits, a weakening dollar, higher oil prices and an emotional presidential election all contributed to tempered growth in the economy and stock market. Although these factors are certain to change, the result will most likely be modest, yet satisfactory, gains in the economy and the stock market over the next several years.
Resolving uncertainty is the largest issue when looking at future stock market returns. During the latter half of 2004, the market was given the certainty of a Federal Reserve committed to raising short-term interest rates due to signs of solid growth in the economy. In addition, a long and emotional presidential campaign came to a clear and undisputed end. In fact, the market achieved almost 80% of its 2004 return after November 2nd. The need for a weaker U.S. dollar also became clear, in the face of growing fiscal and trade deficits. This was clearly affirmed by Alan Greenspan on November 19th when he said: “International investors will eventually adjust their accumulation of dollar assets, elevating the cost of financing the U.S. current account deficit.” This realization has in fact lifted the stock market with expectations of a short-term increase in exports for U.S. manufacturing corporations. While the ongoing positive and negative impacts of these events are debatable, they allowed markets to rationalize. In the absence of terrorism inside our borders, they led to positive economic and market returns.
As we enter 2005, we can begin to see the challenges and uncertainties that lie ahead. What will be the result of the Bush fiscal policy and the towering fiscal and trade deficits? Will international investors continue to overcome the risk of a weak dollar for the safety of the “risk-free” U.S. government bond, or opt for attractive relative U.S. asset prices due to their stronger currencies? Or will a continued decline of the dollar lead to higher interest rates, slower economic growth, higher unemployment, and a weakened consumer? Our guess is that the potential growth of the economy is certainly limited by these risks, but by no means stifled. With long-term interest rates starting the year near historically low levels, and the unemployment rate at a relatively healthy 5.4%, the economy has a strong foundation to maintain stable growth into 2005. With a wary eye toward the war on terror, we feel this environment, though challenging, provides an excellent opportunity to employ our investment management discipline.
Our holdings have outperformed the market this year and we are quite comfortable being significantly deployed in stocks at this time. Our holdings, for the most part, are conservative and dividend paying. GE (our largest holding), General Mills, Kellogg, ConAgra, Johnson & Johnson and J.P. Morgan Chase are good examples. We have also made a particular effort to take positions that are likely to benefit from a weaker dollar; for example, Berkshire Hathaway, PNC Financial and U.S. Bank. As in 2004, we expect to continue taking some of the significant gains in our portfolio as the year progresses. We have several other investments that we plan to make and we expect to have cash available to be opportunistic when the time is right.
As always, we enjoy your questions and comments. Happy New Year!
Monday, January 10, 2005
Saturday, September 11, 2004
Client Letter - 9/11/04
September 11, 2004
To Our Investors and Friends:
Three years after 9/11, despite all that has happened since that day, the socioeconomic tone of our country is best described as uncertain; uncertain about terrorism, uncertain about politics and the election, about the war in Iraq, about the price of oil, about the dollar and, mostly, uncertain about the economic well-being of our country and world.
Since socioeconomic attitudes are what drive the stock market, it too is very uncertain. In the three years since 9/11, the S&P 500 Index has risen just two percentage points. In other words, the Index’s highly touted 26 percent gain in 2003 just barely offset its losses in 2002 and its virtually flat performance thus far in 2004. Since the market had declined significantly in the months prior to 9/11, a more realistic measure is to look at market performance since the beginning of 2001. Viewed that way, the S&P Index has lost approximately 15 percent, a deficit that requires a 17.6 percent gain to offset. In other words, a money market cash investment with a very low yield during that whole period has significantly outperformed an investment in the S&P 500 Index! These unsatisfactory results have occurred despite a significant recovery in corporate profits during the last two years, created by massive monetary and fiscal stimuli.
It’s the economy! In our view, despite terrorist threats, election year rhetoric and the war, what mostly underlies market uncertainty are macroeconomic issues. Here is a non-political description of the situation by Stephen Roach, chief economist of Morgan Stanley, dated September 3rd:
“Forget about politics -- at least for the moment -- and consider the facts: This economic recovery, by most conventional measures, has been amazingly lousy. Annualized growth in real GDP has averaged 3.4% over the first ten quarters of this upturn, far below the 5% norm of the previous six business cycles. Nonfarm payroll employment is up only 0.1%, on average, over the past ten quarters -- hugely deficient when compared with the 2.7% record of the past six recoveries. Real wage and salary disbursements -- the essence of the economy’s organic, or internal, income-generating capacity -- is up at only a 0.8% average annual rate over the past ten quarters versus the 3.9% norm of the previous six upturns. The federal government budget is out of control, having swung from surplus to deficit by six percentage points of GDP from 2000 to 2003. This was key in pushing the net national saving rate down to its all time low of 0.4% of GNP in early 2003. Lacking in domestic saving, the US has had to import foreign saving in order to keep the economy growing; that has given rise to a record current account deficit of 5.1% of GDP. All this speaks of a vulnerable and exceedingly low-quality recovery in the US.”
Considering these facts, but also keeping in mind continued growth in corporate profits, we are carefully proceeding to deploy client capital into the market. Since 2002, when we conserved a significant amount of capital in the market downturn, we have been carefully selecting conservative, value-creating (EVA) equities that we have identified as fairly valued through our intrinsic-value modeling discipline. Many of these stocks have better dividend yields than equivalent money market cash investments and, in our opinion, all provide much better opportunities than the market in general. Our present strategy is to be approximately 70 percent invested in equities, with the balance in money market cash, between now and the election. We took some profits during the summer to protect capital and will not hesitate to do so again. However, we also will not hesitate to deploy additional capital if we see the right opportunity.
We believe that our capital-conserving and carefully analyzed equity strategies have significantly benefited our investors during the challenging times of the past three years, and should continue to do so in the uncertain times ahead. As always, we will be pleased to hear from you.
To Our Investors and Friends:
Three years after 9/11, despite all that has happened since that day, the socioeconomic tone of our country is best described as uncertain; uncertain about terrorism, uncertain about politics and the election, about the war in Iraq, about the price of oil, about the dollar and, mostly, uncertain about the economic well-being of our country and world.
Since socioeconomic attitudes are what drive the stock market, it too is very uncertain. In the three years since 9/11, the S&P 500 Index has risen just two percentage points. In other words, the Index’s highly touted 26 percent gain in 2003 just barely offset its losses in 2002 and its virtually flat performance thus far in 2004. Since the market had declined significantly in the months prior to 9/11, a more realistic measure is to look at market performance since the beginning of 2001. Viewed that way, the S&P Index has lost approximately 15 percent, a deficit that requires a 17.6 percent gain to offset. In other words, a money market cash investment with a very low yield during that whole period has significantly outperformed an investment in the S&P 500 Index! These unsatisfactory results have occurred despite a significant recovery in corporate profits during the last two years, created by massive monetary and fiscal stimuli.
It’s the economy! In our view, despite terrorist threats, election year rhetoric and the war, what mostly underlies market uncertainty are macroeconomic issues. Here is a non-political description of the situation by Stephen Roach, chief economist of Morgan Stanley, dated September 3rd:
“Forget about politics -- at least for the moment -- and consider the facts: This economic recovery, by most conventional measures, has been amazingly lousy. Annualized growth in real GDP has averaged 3.4% over the first ten quarters of this upturn, far below the 5% norm of the previous six business cycles. Nonfarm payroll employment is up only 0.1%, on average, over the past ten quarters -- hugely deficient when compared with the 2.7% record of the past six recoveries. Real wage and salary disbursements -- the essence of the economy’s organic, or internal, income-generating capacity -- is up at only a 0.8% average annual rate over the past ten quarters versus the 3.9% norm of the previous six upturns. The federal government budget is out of control, having swung from surplus to deficit by six percentage points of GDP from 2000 to 2003. This was key in pushing the net national saving rate down to its all time low of 0.4% of GNP in early 2003. Lacking in domestic saving, the US has had to import foreign saving in order to keep the economy growing; that has given rise to a record current account deficit of 5.1% of GDP. All this speaks of a vulnerable and exceedingly low-quality recovery in the US.”
Considering these facts, but also keeping in mind continued growth in corporate profits, we are carefully proceeding to deploy client capital into the market. Since 2002, when we conserved a significant amount of capital in the market downturn, we have been carefully selecting conservative, value-creating (EVA) equities that we have identified as fairly valued through our intrinsic-value modeling discipline. Many of these stocks have better dividend yields than equivalent money market cash investments and, in our opinion, all provide much better opportunities than the market in general. Our present strategy is to be approximately 70 percent invested in equities, with the balance in money market cash, between now and the election. We took some profits during the summer to protect capital and will not hesitate to do so again. However, we also will not hesitate to deploy additional capital if we see the right opportunity.
We believe that our capital-conserving and carefully analyzed equity strategies have significantly benefited our investors during the challenging times of the past three years, and should continue to do so in the uncertain times ahead. As always, we will be pleased to hear from you.
Thursday, April 08, 2004
Client Letter - 4/8/04
April 8, 2004
To Our Investors and Friends:
While still seven months from the presidential election, we are being bombarded by extreme political and economic rhetoric. One side says that because of tax cuts, unusually low interest rates and a weak dollar the economy is growing and that more jobs will eventually be created. The other side says that huge fiscal and trade deficits currently being created will eventually impact us, that jobs are being shipped offshore faster than ever, and that the deficits combined with the weakening dollar will result in substantially higher interest rates that could throw us back into recession.
Who is right? Well, judging by the performance of the stock market in the first three months of the year, both sides are right; it just depends on your time frame. As measured by the S&P 500 Index, the market is up about 2% year-to-date, and despite all the rhetoric about last year’s gains, the market has still not offset the losses it sustained in 2002. In other words, short-term positives are being offset by long-term negatives.
From a strictly economic perspective, it seems to us that corporate earnings, employment and capital spending should continue to increase in the short term, which should result in stronger stock prices between now and the election. On the other hand, regardless of who wins the election, they will have to deal with the macro-economic realities, which indicate that the path we are currently on may not be sustainable in the long term. From a strictly non-partisan point of view, the current administration, if re-elected, may have a better political opportunity to deal with the longer term economic issues, since they would have four relatively rhetoric-free years to bite the economic bullet. However, regardless of who administers it, the economic medicine is potentially quite bitter.
While all of this may sound complex, we truly wish the situation were so simple. Unfortunately, layered on top of this are all of the geopolitical realities we face as a country today. What will happen in Iraq and the Middle East? When will we be hit by another terrorist attack that our leaders seem to be telling us is inevitable? Doesn’t the attack in Spain just before their election tell us that something like that is likely to happen here? These are wild cards vis-à-vis the markets that are totally non-quantifiable.
So what is a conservative investment manager with a strong belief in the ultimate strength of this country to do? First, we believe we must take advantage of good economic conditions when they are occurring and, second, we believe we must continue to be very careful. In mid-2003, we began reinvesting the capital we had so carefully conserved in 2002. Currently we are about 70% invested in stocks, which, together with invested cash, has allowed us to moderately outperform the market this year. As always, we are focused on value-creating companies that are selling at reasonable valuations. We are also trying to own a number of companies that pay dividends, which will provide a consistent “bond-like” return, despite what might happen in the short term. Our largest holding is GE, followed by names like Johnson & Johnson, United Healthcare, General Mills, ConAgra, Berkshire Hathaway, J.P. Morgan Chase, TCF Financial, Dell, Medtronic, Wal-Mart, The Gap, TJX Companies and ATK Systems.
Because of the terrorism wild card, we expect to continue holding a percentage of invested cash, which will vary depending on our perception of the situation between now and the election. It is also our intention to take some of our profits as the year goes on to guarantee returns and generally conserve capital. After the election, we should have a better idea of what is likely to happen in the longer term.
As always, we welcome your thoughts and questions.
To Our Investors and Friends:
While still seven months from the presidential election, we are being bombarded by extreme political and economic rhetoric. One side says that because of tax cuts, unusually low interest rates and a weak dollar the economy is growing and that more jobs will eventually be created. The other side says that huge fiscal and trade deficits currently being created will eventually impact us, that jobs are being shipped offshore faster than ever, and that the deficits combined with the weakening dollar will result in substantially higher interest rates that could throw us back into recession.
Who is right? Well, judging by the performance of the stock market in the first three months of the year, both sides are right; it just depends on your time frame. As measured by the S&P 500 Index, the market is up about 2% year-to-date, and despite all the rhetoric about last year’s gains, the market has still not offset the losses it sustained in 2002. In other words, short-term positives are being offset by long-term negatives.
From a strictly economic perspective, it seems to us that corporate earnings, employment and capital spending should continue to increase in the short term, which should result in stronger stock prices between now and the election. On the other hand, regardless of who wins the election, they will have to deal with the macro-economic realities, which indicate that the path we are currently on may not be sustainable in the long term. From a strictly non-partisan point of view, the current administration, if re-elected, may have a better political opportunity to deal with the longer term economic issues, since they would have four relatively rhetoric-free years to bite the economic bullet. However, regardless of who administers it, the economic medicine is potentially quite bitter.
While all of this may sound complex, we truly wish the situation were so simple. Unfortunately, layered on top of this are all of the geopolitical realities we face as a country today. What will happen in Iraq and the Middle East? When will we be hit by another terrorist attack that our leaders seem to be telling us is inevitable? Doesn’t the attack in Spain just before their election tell us that something like that is likely to happen here? These are wild cards vis-à-vis the markets that are totally non-quantifiable.
So what is a conservative investment manager with a strong belief in the ultimate strength of this country to do? First, we believe we must take advantage of good economic conditions when they are occurring and, second, we believe we must continue to be very careful. In mid-2003, we began reinvesting the capital we had so carefully conserved in 2002. Currently we are about 70% invested in stocks, which, together with invested cash, has allowed us to moderately outperform the market this year. As always, we are focused on value-creating companies that are selling at reasonable valuations. We are also trying to own a number of companies that pay dividends, which will provide a consistent “bond-like” return, despite what might happen in the short term. Our largest holding is GE, followed by names like Johnson & Johnson, United Healthcare, General Mills, ConAgra, Berkshire Hathaway, J.P. Morgan Chase, TCF Financial, Dell, Medtronic, Wal-Mart, The Gap, TJX Companies and ATK Systems.
Because of the terrorism wild card, we expect to continue holding a percentage of invested cash, which will vary depending on our perception of the situation between now and the election. It is also our intention to take some of our profits as the year goes on to guarantee returns and generally conserve capital. After the election, we should have a better idea of what is likely to happen in the longer term.
As always, we welcome your thoughts and questions.
Thursday, November 20, 2003
Client Letter - 11/20/03
November 20, 2003
To Our Investors and Friends:
The markets have moved up this year for two reasons: First, we had a euphoric war rally, which started in the weeks just before we invaded Iraq; and, second, we have had the beginning of an economic recovery, which is at least partially related to next year’s presidential election. Year-to-date, the S&P 500 Index is up approximately 17.5%, a little more than half-way to recovering the losses it incurred last year (a loss of 23.4% in 2003 requires a gain of 30.5% to break-even).
It is conventional wisdom that, somehow, a war is good for the stock market, perhaps because it replaces the anxiety of anticipation with greater certainty and direction. It also represents the “vortex” of the so-called high risk/reward scenario. In the early going, at least, the war went “as planned”, and the market rise seemed justified. We had been very conservative in the year leading up to the war, successfully protecting client capital from the worst year so far in the secular bear market. Our decision was to not take the high-risk/reward proposition, and instead wait for a more comfortable entry point. Given our focus on long-term performance, we considered it worth the risk of missing a “war rally”. As it turns out, much of this rally continues to ride on high-beta (i.e. high-risk) equities, while many of the stocks we follow (lower beta, value-creating companies) have been left behind and still present potentially good opportunities.
After enduring a summer of rather downbeat economic news, the market has continued higher in hopes of a late 2003 recovery, which is what we are seeing, despite a lack of strong jobs growth. Investors have poured money into cyclical stocks, those that benefit from the early stages of economic growth. Many of these have reached levels well above fair value. Because much of this economic recovery is the result of a huge fiscal stimulus, which along with Iraq is contributing to significant deficit spending, there is reason to believe that the recovery may not be sustainable in the longer term, particularly as inflation resurfaces and interest rates rise. For the moment, however, with an election year ahead of us, it is likely that the Federal Reserve and the White House can keep the recovery alive and possibly even re-create some of the several million jobs that have been lost. This has given us a real opportunity to begin reinvesting cash that has been kept in safekeeping.
Our portfolio opportunities are focused generally on protective stocks that generate high value creation and good dividends, and which are seemingly out of favor at the moment. Examples include General Mills, General Electric, ConAgra, Johnson & Johnson, and TCF Financial. We are also seeking good valuation in proven growth companies such as Medtronic and UnitedHealth Group. We will not rush to invest cash in hopes of catching up with this year’s “beta-chasing” or “cyclical” rallies. None of our holdings will deviate from our strategy of investing in companies with consistently good returns on capital and reasonable valuations.
We continue to be very careful about what we do. As we return to greater normalcy (and we do hope that’s the case) we will see, at various times, the market declining, rallying, and rotating among sectors. However, given the mix of economic uncertainty, the obvious threats of global terrorism, and the high level of stock market speculation, the significant volatility of the past several years is likely to continue. We have endured the early stages of this secular bear market through capital preservation. That is the single most important element to outperforming the market in the long term. There will be more rallies and sector rotations to come, and we will look to our investment discipline to guide us.
Best wishes for a good holiday season,
To Our Investors and Friends:
The markets have moved up this year for two reasons: First, we had a euphoric war rally, which started in the weeks just before we invaded Iraq; and, second, we have had the beginning of an economic recovery, which is at least partially related to next year’s presidential election. Year-to-date, the S&P 500 Index is up approximately 17.5%, a little more than half-way to recovering the losses it incurred last year (a loss of 23.4% in 2003 requires a gain of 30.5% to break-even).
It is conventional wisdom that, somehow, a war is good for the stock market, perhaps because it replaces the anxiety of anticipation with greater certainty and direction. It also represents the “vortex” of the so-called high risk/reward scenario. In the early going, at least, the war went “as planned”, and the market rise seemed justified. We had been very conservative in the year leading up to the war, successfully protecting client capital from the worst year so far in the secular bear market. Our decision was to not take the high-risk/reward proposition, and instead wait for a more comfortable entry point. Given our focus on long-term performance, we considered it worth the risk of missing a “war rally”. As it turns out, much of this rally continues to ride on high-beta (i.e. high-risk) equities, while many of the stocks we follow (lower beta, value-creating companies) have been left behind and still present potentially good opportunities.
After enduring a summer of rather downbeat economic news, the market has continued higher in hopes of a late 2003 recovery, which is what we are seeing, despite a lack of strong jobs growth. Investors have poured money into cyclical stocks, those that benefit from the early stages of economic growth. Many of these have reached levels well above fair value. Because much of this economic recovery is the result of a huge fiscal stimulus, which along with Iraq is contributing to significant deficit spending, there is reason to believe that the recovery may not be sustainable in the longer term, particularly as inflation resurfaces and interest rates rise. For the moment, however, with an election year ahead of us, it is likely that the Federal Reserve and the White House can keep the recovery alive and possibly even re-create some of the several million jobs that have been lost. This has given us a real opportunity to begin reinvesting cash that has been kept in safekeeping.
Our portfolio opportunities are focused generally on protective stocks that generate high value creation and good dividends, and which are seemingly out of favor at the moment. Examples include General Mills, General Electric, ConAgra, Johnson & Johnson, and TCF Financial. We are also seeking good valuation in proven growth companies such as Medtronic and UnitedHealth Group. We will not rush to invest cash in hopes of catching up with this year’s “beta-chasing” or “cyclical” rallies. None of our holdings will deviate from our strategy of investing in companies with consistently good returns on capital and reasonable valuations.
We continue to be very careful about what we do. As we return to greater normalcy (and we do hope that’s the case) we will see, at various times, the market declining, rallying, and rotating among sectors. However, given the mix of economic uncertainty, the obvious threats of global terrorism, and the high level of stock market speculation, the significant volatility of the past several years is likely to continue. We have endured the early stages of this secular bear market through capital preservation. That is the single most important element to outperforming the market in the long term. There will be more rallies and sector rotations to come, and we will look to our investment discipline to guide us.
Best wishes for a good holiday season,
Thursday, August 21, 2003
Client Letter - 8/21/03
August 21, 2003
To Our Clients and Friends:
The world seems to be returning to more normal circumstances, now that concerns about Iraq and terrorism have at least partially diminished and the U.S. economy is staging the beginnings of a comeback. To be sure, there are many geopolitical and economic concerns (such as deflation), but it is hard to say when or how severely some of these problems might impact us. Simple logic tells us that there is more terrorism to come, and that we are not out of the economic woods. For that reason, we would describe our current situation as being on the ragged edge of normalcy.
By the same token, this condition we have described tells us that the equity markets have greatly over-reacted to the situation at hand, particularly in the technology sector, and that these “semi-normal” conditions dictate a pull back from the current re-inflation of the equity bubble, to more normal valuation levels. This will allow investors to earn reasonable market returns, based on the fundamental principle of sustainable earnings growth. In other words, if we indeed are returning to normal market conditions, stocks will resume moving up and down based on real earnings and cash flow, not euphoria and speculation. For the most part, that hasn’t happened yet.
In an August 11th article entitled, “Doesn’t Value Matter Anymore?” Richard Bernstein, chief equity strategist of Merrill Lynch, writes: “The speculative nature of the stock market is again damaging the economy as it did during the bubble. Capital is again being misallocated within the economy…. We have repeatedly pointed out that today investors are paying to take risk rather than demanding compensation. Our newest research further confirms our earlier findings that investors are acting as though value does not matter anymore.”
Within this complex environment, we are proceeding very carefully. First, we are very mindful of our success in conserving our clients’ capital over the last two years and we do not want to take undue risk with that capital in this environment. On the other hand, risk-free U.S. Treasury money-market returns are at unacceptably low levels. To deal with this dilemma, we are following a strategy that calls for investing a portion of our managed assets in a small group of very substantial companies that are either fairly or under-valued, based on our well-developed modeling discipline. All of these companies provide dividend returns that are higher than money market yields and offer appreciation potential, over time, based on their current valuations. In that regard, we view them as being safe and even somewhat “bond-like”, since for the most part they provide yields comparable with 5-10 year bonds and their “principal” is virtually safe over time. If the market moves down (which it eventually will if “normalcy” truly is returning) we will make further investments in these companies to average down our price. If market euphoria continues, which it may through the rhetoric of the 2004 presidential election, we may take profits or we may simply hold on and continue collecting the dividends.
We believe that our current strategy will allow us to outperform the S&P 500 index, over time. We may under perform a bit in the short term, because we are protecting client capital, but in the long term we will outperform the index, as we have consistently been able to do, since our inception. In this regard, it is important to recognize that the S&P 500’s loss of 23% in 2002 requires a subsequent gain of 30% just to break even. On the other hand, not having taken those kinds of losses last year allows us to carefully move forward, as described above.
Please let us know if we can further explain our strategy, or provide additional reading material on current economic and market conditions.
To Our Clients and Friends:
The world seems to be returning to more normal circumstances, now that concerns about Iraq and terrorism have at least partially diminished and the U.S. economy is staging the beginnings of a comeback. To be sure, there are many geopolitical and economic concerns (such as deflation), but it is hard to say when or how severely some of these problems might impact us. Simple logic tells us that there is more terrorism to come, and that we are not out of the economic woods. For that reason, we would describe our current situation as being on the ragged edge of normalcy.
By the same token, this condition we have described tells us that the equity markets have greatly over-reacted to the situation at hand, particularly in the technology sector, and that these “semi-normal” conditions dictate a pull back from the current re-inflation of the equity bubble, to more normal valuation levels. This will allow investors to earn reasonable market returns, based on the fundamental principle of sustainable earnings growth. In other words, if we indeed are returning to normal market conditions, stocks will resume moving up and down based on real earnings and cash flow, not euphoria and speculation. For the most part, that hasn’t happened yet.
In an August 11th article entitled, “Doesn’t Value Matter Anymore?” Richard Bernstein, chief equity strategist of Merrill Lynch, writes: “The speculative nature of the stock market is again damaging the economy as it did during the bubble. Capital is again being misallocated within the economy…. We have repeatedly pointed out that today investors are paying to take risk rather than demanding compensation. Our newest research further confirms our earlier findings that investors are acting as though value does not matter anymore.”
Within this complex environment, we are proceeding very carefully. First, we are very mindful of our success in conserving our clients’ capital over the last two years and we do not want to take undue risk with that capital in this environment. On the other hand, risk-free U.S. Treasury money-market returns are at unacceptably low levels. To deal with this dilemma, we are following a strategy that calls for investing a portion of our managed assets in a small group of very substantial companies that are either fairly or under-valued, based on our well-developed modeling discipline. All of these companies provide dividend returns that are higher than money market yields and offer appreciation potential, over time, based on their current valuations. In that regard, we view them as being safe and even somewhat “bond-like”, since for the most part they provide yields comparable with 5-10 year bonds and their “principal” is virtually safe over time. If the market moves down (which it eventually will if “normalcy” truly is returning) we will make further investments in these companies to average down our price. If market euphoria continues, which it may through the rhetoric of the 2004 presidential election, we may take profits or we may simply hold on and continue collecting the dividends.
We believe that our current strategy will allow us to outperform the S&P 500 index, over time. We may under perform a bit in the short term, because we are protecting client capital, but in the long term we will outperform the index, as we have consistently been able to do, since our inception. In this regard, it is important to recognize that the S&P 500’s loss of 23% in 2002 requires a subsequent gain of 30% just to break even. On the other hand, not having taken those kinds of losses last year allows us to carefully move forward, as described above.
Please let us know if we can further explain our strategy, or provide additional reading material on current economic and market conditions.
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