4th Quarter

January 17, 2004

In the years ahead, 2003 will be remembered for many significant events. Among the many financial highlights of the year, two stand out for their direct impact upon our clients. The first of these events, and the biggest financial story of the year, was that 2003 was the year that we finally broke the shekels of the bear market with all major United States indices posting large gains. The second event was, of course, the disheartening mutual fund scandals that plagued the industry for most of the year. Indeed, these scandals should have stifled the markets as they did in 2002. Surprisingly, investors seemed to shrug them off.

So, what was the impetus behind the surge in the stock market? Was it that investors perceived that the economy was getting better? Was it that consumers were getting confident of their future job prospects? Or, is it that people have begun to accept that all scandals, including the mutual fund scandals, and even terrorism are a part of life and that stock market performance should not hinge on such matters?

We believe part of the answer lies in fundamental finance theory. The cornerstone of investing is asking the question: Does the underlying security have sufficient earnings to warrant the current price? Just as you would think twice before over-paying for an item in the grocery store, you should guard against over-paying for financial instruments. The stock market battering between 2000 and 2002 was due mainly to companies not delivering on their promises and, moreover, investors over-estimating the profitability of companies. Positive earnings results in 2003 helped boost investor confidence in future corporate earnings growth, which propelled equity prices higher.

As much as we are pleased with the performance of the past year, we caution you against becoming overly- optimistic about 2004. We advise you that last year’s performance is not the norm, but an exception to the returns of the past. As we step into 2004, the following questions linger in our minds: Will 2004 corporate earnings continue to support the higher prices we have been experiencing in the stock market? While the United States corporate and economic forecasts look “rosy” for the first half of 2004, what will happen during the second half of the year? At what point are the budget and trade deficits too large? On the global stage, what impact will a continually declining dollar have on our economy

All of these questions remind us about the importance of a diversified portfolio – spreading your investments among several distinct, but independent, investment baskets. Furthermore, we fervently believe in our investment philosophy of picking competent managers who are dedicated to investing in quality companies at discount prices, so that you are able to weather the storms and eventually reach your financial goals.

Thank you for your continued support and best wishes to you and your family for continued health, happiness and prosperity in the year 2004 and beyond.

Sincerely yours,

 

P.S. Please note that the 2003 tax information will be mailed in a separate mailing by mid-February