Market Commentary

Consistency and Balance

July 2009

"The secret to success is constancy of purpose" - Benjamin Disraeli

We write amidst continued relief that the stock and bond markets have rallied back both here and abroad from the nadirs they reached last March and November. It is good to see positive numbers this year, and the reports in your hands right now reflect that.

Daily deliberations on the question of 'where do we go from here?' abound in the press. We hear strong calls from intelligent people that deflation will continue. From others, that inflation is coming. Some say the economy is rebounding. Some say we have a long way to go. The Fed thinks we may have an economic recovery but with continued rising unemployment. Buy commodities. Sell commodities. Buy gold. Buy Treasuries. Sell Treasuries. Because we are living in the wake of something akin to a perfect financial storm, the opinions advocated out there for what's next seem to be more contradictory and more cacophonous than usual. No doubt some of you have sensed this too.

We remain focused on what we think will work on a fundamental basis for our clients over a long period of time: Set an absolute return target that is an actual number. Don't pay too much attention to the benchmarks. Invest in a diversified way. Balance prudently amongst asset classes so that you have a mix that is targeted to smooth volatility and performance, both. Tilt back and forth, but not too radically so, between asset classes depending on where we see apparent excesses of either opportunity or risk. Try to minimize taxes in taxable accounts. Buy investments on sale, so that they have a higher likelihood of going up in value over time. Be patient. Pay attention. Be willing to change your mind in the face of contrary evidence. Don't panic. Stay in touch with our clients about all of this and more. Repeat.

On this approach, we are not alone. In fact the managers we work with to invest your assets strike us as much the same way. We like what Matt McClellan, the manager of the First Eagle Global fund, has to say about investments in these times and in any times: "Starting with the first recorded and reliable history that we can find - a history of the Peloponnesian war by a Greek author named Thucydides - and following through a broad array of key historical global crises, you see recurring aspects of human nature that have gotten people into trouble: hubris, dogma, and haste."* Like Matt and his team, we try to avoid all three of these things. Instead, humility, flexibility, and patience are our watchwords - and inform our methods - too.

We think you have done a great job of keeping your cool over the past year. We have meaningfully partnered with you, our clients, to steer your financial future and your portfolios during a difficult, volatile time, and during the hardest of times almost every single one of you stayed invested and are being rewarded now with a reversal of portfolio fortunes and positive returns. Throughout the downturn last fall and earlier this year, you stayed invested much the way you had been invested for years. We know it hasn't always been easy and we appreciate your continued trust and confidence in working with us on this.

Of course we have opinions on what will appear on the horizon. We think the furious rally we've seen since mid-March came partly from relief, and partly, as we last wrote, from a human tendency to exhaustion after so much panic worked its way through the system. For now, fear of the imminent collapse of financial institutions is off the table, and corporate earnings are coming in somewhat better than expected, admittedly off of very low expectations. A bungee jumper snaps back quite hard before finally settling at the level lower from which they jumped. We do think that the rally has come far enough that at least some parts of the market have overshot their fair value level, and we are not inclined to tilt anyone more meaningfully towards equities or real estate at this time. We are still in a terrible recession. We have shocks to the financial system probably still coming that we can't quite see. We may grow the U.S. economy in a shallow way for awhile, but it will take years for the U.S. consumer, quickly morphing into a saver, to recover. China is re-flating on a wave of government cash that we think can't last, and the U.S. is spending trillions to make sure our financial system remains orderly. It's a lot for the market to absorb before we think earnings or valuations can go sustainably higher.

We are confident even in the face of these uncertain prospects, though, that your portfolios are adequately positioned for this uncertain environment. We assess our portfolio structure regularly, and will respond as needed if a shift in the environment or a shift in investment prices warrants it. Inside your portfolios, equity managers are extremely cautious with how they commit money in their efforts to control downside - including bonds, cash, and/or gold as appropriate in the asset mix. The dedicated fixed income portion of portfolios focus on investments with asset stability in mind - your bond investments are concentrated in shorter-term high quality issues that are targeted to pay more than cash or money market accounts, and yet offer a volatility profile much reduced from that of stocks. Although, neither diversification nor asset allocation guarantee against loss, they are methods used to manage risk.

We continue to counsel patience. An old Dutch proverb quips that an ounce of patience is worth a bushel of brains. We like to think we have access to both for you, and will patiently deliberate and invest, working to keep a clear head amidst the uncertainty and prognostications.

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

* Value Investor Insight, June 30, 2009, p.2