Thoughts - 9/12/01

Thoughts for Clients Sept. 12, 2001


We expect markets to be closed for a couple of days, perhaps until next week…A good thing.

There will probably be some selling when the markets do open, primarily from mutual fund redemptions. We don’t think this will continue, although it will take stocks lower for the time being.

We do not believe it would be wise to sell stocks at this time, even if there is a decline. If there should be some reason to accumulate cash in the near future it would be advisable to wait a few days in any event.

In the absence of further terrorist developments at this time (and it now appears that this was a one-time attack rather than a coordinated series of attacks) the economy should not be drastically affected overall. It is possible that consumer confidence will decline temporarily, but if nothing else develops, that decline should not be drastic. However, it is possible that a lethargy in consumer spending could result for a period of time which would precipitate the recession which continued consumer confidence has been delaying for the last few months.

Impacts on particular holdings:

Citigroup… Travelers Insurance, short term negative, long-term neutral

Technology, computers, telecommunications, probably benefit in longer term, neutral short term

Pharmaceuticals and medical technology, neutral to positive short term, positive long term.

Bottom line for us: Be calm, study, watch, wait, look for opportunities.

Investment Strategy

Investment Strategy

Identify and invest in companies that consistently create “economic value added” (EVA) for their shareholders. EVA is measured by determining a company’s cost of capital and comparing it with annual return on investment (ROI) generated by the company’s net operating profit.

Value-creating companies frequently also have high market valuations. Therefore, we also perform intrinsic value analysis on the companies we follow to determine which are the best investments.

We do this by studying long-term earnings expectations and projecting cash requirements (for capital expenditures, working capital etc.) to determine likely free cash flows over time.

We then calculate the present value of these free cash flows to determine the intrinsic value of each company.

Strategy is to seek out and invest in economic value-creating companies that are reasonably priced relative to their intrinsic values.

- Quality and Consistency are the watchwords of successful long-term investing.

- Own EVA stocks consistently.

Meet Jack and Peter Falker

Professional Qualifications

Peter J. Falker, CFA

- Primary research and investment officer of FalkerInvestments Inc.

- Securities market experience includes:
Farallon Fixed Income Associates (now Bracebridge Capital), Boston, Mass.
Mitchell Hutchins Asset Management, a unit of Paine Webber Inc., New York, N.Y.
Internship positions with U.S. Bank Piper Jaffray and Dain Rauscher Wessels Inc.

- Graduate of the University of St. Thomas with a BA in Economics, 1995.

- Graduate of St. Thomas Academy, 1991.

- Has earned the right to use the Chartered Financial Analyst designation.

* EVA is a registered trademark of Stern Stewart & Co.

John R. (Jack) Falker

- Primary operating officer of FalkerInvestments Inc.

- Active in the practice and teaching of corporate finance for more than 40 years.

- Formed FalkerInvestments after leaving Swenson/Falker Associates, the financial relations firm he co-founded in 1987.

- Corporate treasurer in two Fortune 500 companies.

- Taught applied cost of capital theory and shareholder value maximization to finance majors at the graduate level for many years.

- Advocate of the concepts set forth in the “Quest for Value,” Bennett Stewart’s book which revitalized applied cost of capital theory and set in motion the current attention being paid by corporate managers to the EVA* concept.

- Graduate of the University of Michigan and the University of Detroit with an MBA in Corporate Finance and a BA in English Language & Literature.