4th Quarter

January 17, 2002

If asked to characterize the year 2001, I am sure each one of you would have a slightly different interpretation. To some it was a year of changes, to others, a time of unprecedented challenges. To most, it was a year of realization of how vulnerable we could become. For us at American Investment Advisors, Inc. (AIAI), it was a year that could not come to an end too soon. The year that started off with the election of a new president, the hope of a fresh beginning and the promise of a new vision ended with America at war with Afghanistan, India and Pakistan on the verge of war, a world in recession and back to back annual stock losses for the first time since 1974.

On the investment front, 2001 was perhaps the year that we finally understood what Alan Greenspan meant when he alluded to the notion of “irrational exuberance.” The excess inventories, the dearth of demand for technology and telecommunications gear, and the overextended P/Es coupled with the terrorist attacks of September 11th forced all three indexes to new lows toward the end of September. It was also the year we understood that manipulating interest rates was not a panacea for the economy. For the record, the Dow Industrials ended the year down 7% while the S&P 500 and NASDAQ indexes were down 13% and 21% respectively.

According to a government select committee on economic activity, we are now in a recession and, in fact, have been so since March 2001. Though inflation and interest rates remained low, the unemployment level, which was at a historically low 3.9% a year ago, jumped to its current level of 5.8% during the fourth quarter. The year 2001 witnessed a staggering 1.8 million Americans losing their jobs. The only bright spot in an otherwise gloomy financial landscape was the robust housing market. Thanks in part to historically low mortgage rates and favorable weather, the housing market experienced another spectacular year.

As we head into the new year, we are under no illusions that we live in turbulent times. The new dawn brings with it new challenges and it is definitely not business as usual. There is uncertainty in every corner. On the investment landscape there is much debate as to the returns we can expect going forward. There is a widespread consensus that we are going to experience a long period of mid to high single digit returns on equities. There are even analysts and portfolio managers who subscribe to the belief that bonds will outperform stocks once again in 2002.

However, we at AIAI do not hold ourselves out to be soothsayers or prophets. We do what we do best, and that is to construct well-balanced portfolios using the best funds available in the mutual fund market place. For, together with the souring economy and the vile terrorist attacks, we had to endure the loss of our founder, Allan Topp. We can safely say that never before in the history of AIAI have we strived harder to service our clients. We stood by our convictions and stayed the course when other investors were selling at an alarming pace. Nevertheless, one day, many years from now when we look back at the year past, if we are able to say that “two roads diverged in a wood and I (we) took the one less traveled by, and that has made all the difference” it would have all been worthwhile.

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 December 31, and a quarterly Account Management Fee Statement.

Sincerely yours,

 

P.S. For all taxable accounts, we will mail 2001 information on realized gains and losses by the end of January. You will receive 1099 forms directly from your custodian at approximately the same time. If you prefer this information be mailed directly to your tax preparer, please advise us.