3rd Quarter

October 14, 2002

Words elude us to describe the investment landscape in the third quarter. The truth is that there are no words good enough to express the pain and anguish investors and advisors have gone through during the past nine months. Analysts, Wall Street gurus, and investment pundits keep inundating the media with their own reasons for the recent market debacle, and dish out words of wisdom of what to expect in the coming months. But, as we all know, the former is hindsight and the latter, merely hypothesis.

Our take on all this is summed up in the words of the Oracle of Omaha – Warren Buffet, who once said “In the short run, the market is a voting machine but in the long run it is a weighing machine.” This quarter aptly demonstrated the short-term point very clearly, voting in favor of bonds and bond funds and voting against equities. In the long run, however, equities and compound interest have provided investors with annual returns to hedge against inflation and taxes. But, the question remains, what do we do in a sustained downturn?

For some individuals it means moving into more fixed income, while for others it means sitting tight and waiting out the storm, and yet for others it means increasing their holdings of mutual funds and equities at depressed prices.

Nevertheless, as your financial advisor, it has always been our investment philosophy not to engage in market timing. It is our belief that the soundest financial advice should be given at the genesis of investing. We are not soothsayers and as such do not profess to know anything about the future. Therefore, our mission has always been to develop a target allocation for each individual investor based on risk tolerance, investment time horizon and other criteria, and thereafter, build balanced portfolios around that target allocation that should be able to withstand extreme market volatility.

At this juncture, we would like to share with you the following excerpt from an article that appeared on September 26th in the Wall Street Journal that addresses some questions people may have regarding the stock market.

Does the market have a bottom?
The quick answer is yes. Stocks will stop falling.The unknown is where and when.

What’s important to remember is that assets have a value. Stocks, despite the 1990s mentality, aren’t lottery tickets. They are pieces of paper denoting ownership of an asset. Take Tyco. Despite its battered status, the company’s most recent balance sheet shows shareholder equity of more than $27 billion, or a bit shy of $14 a share. That equity was generated off real revenues from real businesses, everything from home security systems to health care to plastics.

Many market analysts and money managers believe we are getting close to a market bottom. The market has already matched the 48% peak-to-trough loss of the 1973-1974 bear market, notes Jason Trennert, senior managing director at ISI Group in New York. ‘A lot of the market’s overvaluation has been addressed,’ he says.

Based on other measures, stock prices are moving closer to historical norms. The S&P 500 index is trading at roughly 15.5 times next year’s estimated earnings. That’s down from a peak of 34 times forward earning just two years ago.

Can any company be trusted?
Yes, though that’s not easily seen through the fog of Enron, WorldCom, Tyco and others that shocked investors with accounting shenanigans.

‘Most companies are not lying,’ says Charles Pradilla, the chief investment strategist at SG Cowen Securities. Moreover, the sharp response to financial misdeeds has provided top executives with a powerful reminder of the costs of not playing by the rules. ‘I think we have a change in business culture that will lead to companies’ making smarter business decisions, says Richard B. Hoey, chief economist and chief investment strategist, Dreyfus Corp. ‘Accounting will become more honest.’”

In the final analysis, none of us know what tomorrow brings. We are all hurt, more aptly, disgusted by all the recent accounting scandals, and we’ve all been affected, one way or the other, by the bear market. Yet, one thing remains for certain – we’ve been through trials and tribulations in the past, and our faith in the markets and in investing has been shaken more than once. Yet, we have withstood the test of time and emerged triumphant every time. If history is any guide, this time should be no different.

If you desire Morningstar reports, or the most recent copy of our Form ADV, Part II, please call. 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 September 30th, and our quarterly Account Management Fee Statement.

Sincerely,