OCTOBER 2008 NEWSLETTER

Since September 1st, we have now seen approximately $92 billion in outflows from stock mutual funds. At first glance, this number would appear staggering and lead you to believe that people are selling off at a frenzied pace. In actual fact, this represents only 1.5% of the total dollars in the stock mutual funds according to Trim Tabs, a market research firm. It is amazing that such a small percentage of the investing public can have such a significant effect on the market as a whole. As we mentioned in previous communications, always keep in mind that for every sale of a share of stock, there is a buyer on the other side of the trade. These buyers are investors who are taking advantage of a market phenomenon known as the odd lot (or small v. large transactions) theory. This theory of investing maintains that the lay (or small transaction) investor consistently will act irrationally and incorrectly, buying at market highs, and selling at market lows. It is a contrarian principle that guides the informed investor to always do the opposite of these investors.

Another trend we are noticing is that companies are buying back their own shares. Why would companies be doing this now? They do this for one of two reasons. Either they are looking to reduce public control of the corporation at a given time, or they anticipate that their shares are undervalued and will appreciate in the near future. We feel that it is the latter.

There are other trends at work that also seem to contradict the nightly news lead stories of the sky falling. Earnings reports for several large companies have outperformed the experts’ projections. Of note: JP Morgan, Johnson & Johnson, and Google. And while we’ve mentioned this before, oil continues to dip in price, as low as slightly below $70 a barrel (less than ½ it’s record highs of just a few months ago).

Lastly, in an op-ed piece in the NY times this past week, Warren Buffett has come out and said that his personal portfolio has just recently been converted from US treasuries to primarily US equities. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” He went on to say: “Fears regarding the long-term prosperity of the nation’s many sound companies makes no sense.” -NY Times, 10/17/08.

So what does this mean for you and your portfolio? In the short term, the answer is you are diversified via sector, geography, cash flow and, for some, contractual guarantees so that you can withstand periods of downward volatility; Even one as extreme as this. The plan remains to let rationality return to the pricing of equity investments and then exit in an orderly fashion. In the meantime, we are researching the possibility of taking advantage of the extremely low prices of income producing investments. We may recommend beginning to build an income production engine now and plan to hold it for the long term. We will keep you informed of our findings and recommendations.

Respectfully,