Market Commentary

On Change, Your Plans, and Investments

March 2009

"Change alone is eternal, perpetual, immortal." - Schopenhauer

We are going through a time of change in our economy and in our culture. Of course it is mostly negative news of change that rules the day. Comparisons to the Great Depression, continued questions about solvency in the bank sector, dramatic increases in unemployment and other negative news invite us to feel 'certain' that what feels bad now can only get worse, including the prices of stocks. And, we think this will be this way for some time.

In a sense we always are in a time of change. We are now in a time when many of you are feeling a significant degree of stress about your investments, your household cash flow, and about your future financial and life plans. While we have built financial plans with you over the years you've been working with us, we think it's a good idea to check in with you over the coming months for a fresh look. Getting grounded in your financial actuals and creating an action plan can be a very helpful antidote to the free-floating anxiety over money that we know many of you are feeling.

What has changed in your investments. Last week Kate traveled to New York and had extensive conversations with two fund management teams that account for a significant portion of the stock exposure in many of your portfolios - First Eagle and International Value Advisors (IVA). These investors, like us, are aware that there is a human tendency to predict the future and to do so according to the status quo. This leads to linear extrapolation according to the present trend which never plays out – reality is much bumpier than that, for both better and worse. Just as earnings and stock prices don't go up forever, as people perhaps thought they would in 2006, they don't go down forever either, as some feel they might now. We hear regularly from pundits, scholars and clients who have a high degree of conviction about continued short-term downward movements in the market – perhaps they are right, and perhaps they are not. We remain more interested in the fact that stocks are long-term investments that protect purchasing power over time.

IVA and First Eagle don't see current stock prices as necessarily so connected to specific prospects for the specific businesses in which they have invested your money. We and they think that all investors are going through an adjustment to the valuation of the assets that you hold. This adjustment could be long-term and will possibly stand for many years. The fundamental soundness of the businesses they invest in for you has not changed; only the price investors are willing to pay for them has changed. And, while their long-term earnings trajectories and balance sheets are sound, like many other businesses they will go through a period of diminished earnings. This means that while it is difficult emotionally to see asset levels decline due to downward stock price volatility, we don't believe that your capital is permanently impaired. On the stock front, we continue to invest you in good businesses at good prices. We have a high degree of confidence in the sustainability of these businesses' earnings over an entire market cycle and on their ability to survive and thrive going forward.

We wish to be a patient and steady hand at the wheel in a period of panic. This is not to say we are Pollyanna or even sanguine about the prospects for quick economic recovery. We think this will take some time. However, we think you own good businesses at good prices on the stock side, so we think you are well-positioned for the long-term.

What needs to change – or not – in your portfolio. What about your earnings and your balance sheet, and your ability to go through a period of diminished earnings or returns? That's up to the management team of you and us. The task in front of us, working together, is to confirm the strength of your balance sheet, to be certain that you have enough liquid assets that are stable enough in value to sustain any needed withdrawals without selling out your long-term and more volatile equity allocation at today's low prices. And, working with you, we can help you clarify what financial choices at this time – around spending, saving, living, and life goals - will likely create significant impacts on your long-term financial outcome.

Focusing on your individual situation is the way we can create some certainty that can ground you in the midst of the temptation to extrapolate down to the bottom. The part of your portfolio that is invested to preserve purchasing power over the long term – the stocks – is currently depressed in price and we do not want to sell it. The remainder of your portfolio is targeted to serve your liquidity needs and is invested in instruments such as cash, money market investments, and other fixed income investments such as bonds and bond funds.

The portion of your balance sheet that is available to you in the form of ready liquidity should match your needs over at least the next three to five years. We have been looking at this question in all client portfolios during our internal reviews recently, and will continue affirming all of our clients' liquidity and liquidity needs as we go through our regular cycle of client portfolio reviews and recommendations. Of course, we welcome conversation with you at any time. We want to be sure you are getting the information you need, and the analysis you need to help you be grounded and make good decisions.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.