2nd Quarter

July 10, 2001

On the wall in the lobby of American Investment Advisors is a painting with the caption: “Great challenges offer the greatest rewards. How we meet them reveals the truth in all of us.” In the realm of investing, the year 2001 has so far turned out to be one of the most challenging and turbulent. I’m sure you will concur. Nevertheless, one day many years from now, when we look back on these times, we at American Investment Advisors hope to be able to say that we kept the faith. It is also our fervent wish that as investors we would be able to look back and say in one voice that in the year 2001 we found our faith again in investing. Eventually, when the dust settles and the turbulent market tide dies down, we will then see, as investment guru Warren Buffet puts it “who swam without their clothes on.” Did we stand firm in our investment beliefs and stay the course, or did we capitulate under pressure? Did we give into the doomsday prophets or did we have the courage of our convictions?

On April 4th of this year we witnessed the NASDAQ index hit a low at 1638 only to recover and post doubledigit gains for the month. Sadly, that exuberance was short lived and since May the index has merely been treading water. The index to profit from the resurgence of “value” investing has been the blue-chip laden Dow Industrials. Though lately, it too has given up most of its past couple of months’ gains. For the record, the price-earnings multiple on the S&P 500 index, which was well above 30 at the zenith of the stock market boom and is currently hovering around 23, offers ample evidence as to the extent of the carnage that has befallen equity investors.

However, investing is a long-term proposition where one should not be beguiled by short-term phenomena. What is essential in investing is to have a well-diversified portfolio, stay the course and remain invested at all times. As you are well aware, trying to time the market is a loser’s game. It has also been documented that being out of the market at any time has more negative consequences than positive. Nevertheless, the cornerstone of investing is one’s investment time horizon. It has often been said that only when you need the use of your money does risk become an issue. Until then, it is all merely a paper loss or a paper gain.

As the second quarter gives way to the third, we remain optimistic about the future prospects of the market. The domestic economy, though not as robust as past years, is still holding up. The highlight of the year has been the resiliency of the American consumer. As companies continue to slash their capital expenditure budgets and industrial production keeps ebbing lower each month, consumers have kept the economy afloat with their penchant for goods and services. We trust that the interest rate cuts initiated by Greenspan & Company would have their intended effect toward the end of the year. It is also hoped that the proposed tax cuts would ignite worker productivity and provide the economy with an added stimulus. However, in the final analysis, there is no magic formula to jump start Wall Street. What is needed for this market to turn around is for companies to start generating improved earnings.

We stand steadfastly behind our investment philosophy of designing well-balanced portfolios for all of our clients. We also continue to believe in our four favorite sectors – healthcare, financials, technology and telecommunications. In investing, as in life, one will encounter bumps and setbacks from time to time. How we navigate through these trying times will dictate whether we reach our ultimate goals and objectives. We are optimistic that the winter of our discontent is finally behind us and the glorious summer has just begun.

If you desire Morningstar reports, or the most recent copy of our Form ADV, Part II, please call us. If your investment objective or personal financial situation has changed, it is important to notify us so we can reevaluate your portfolio. Enclosed, you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of June 30, and a quarterly Account Management Fee Statement.