3rd Quarter

October 14, 2004

BORING. If there is one word to describe this past quarter’s performance, it could probably be summarized by that one word – boring. There has been too much uncertainty with the war in Iraq, the upcoming presidential election and corporate earnings to allow the market to move in any one direction for any significant period of time.

We continue to read about dampened future return expectations from mutual fund managers. Dodge and Cox explains that their “expectations for future returns are lower…That said, we believe our long-term focus on evaluating each company’s absolute investment merit will continue to serve the Fund’s shareholders well.” James Gipson from the Clipper Fund exclaimed, “The current lack of cheap opportunities is a challenge to even the most able investor. In contrast to the better market of two years ago when we found a number of cheap stocks to buy, recently we found more to sell.”

Many people are pointing to high energy prices as the culprit to the modest stock returns over the past few months. Ed Yardeni of Oak Associates said that the United States consumes 20 million barrels of oil per day. “At $50 a barrel, the annual oil bill is $365 billion. Nominal GDP (gross domestic product) was $11.7 trillion during the second quarter. Oil is literally a drop in the bucket.” Bill Miller at Legg Mason Value is one mutual fund manager who is very light in energy companies within his mutual fund. He has subscribed to the theory by Thomas Gold, the prominent astrophysicist, that oil may not be a finite resource. Instead, Gold suggests that it may be something that seeps from the core of the earth; thus, giving us an inexhaustible supply of oil going forward. Could you imagine what would happen to the price of a barrel of oil if this theory were proven to be true?

Once again, the opinions on where the markets are going vary depending on who you ask. We remain confident in our mutual fund selections and believe that these managers have your best interests at heart. After all, most, if not all, of these managers have their personal money invested together with yours in the funds we have selected for your portfolio.

Enclosed, you will find your Portfolio Holdings Statement as of September 30th, Portfolio Performance Summary and a quarterly Account Management Fee Statement. Please call us should you desire the most recent copy of our Form ADV, Part II. In addition, do not forget to notify us should your investment objectives or personal financial situation change

As many of you know, Charles Schwab and Co., Inc. has been in the news as of late. Many Schwab stockholders were upset over the declining share price the past few years and they wanted to see some corporate leadership changes. David Pottruck was subsequently fired as CEO and replaced by Schwab’s namesake, Charles Schwab. After listening to a conference call and reading all of the applicable articles in the Wall Street Journal, we are confident that this change will benefit our clients who custody their assets at Schwab Institutional. We believe that Schwab, over the years, has lost focus on what made this firm the firm that it once was – a champion of the small investor. Schwab has recently noticed this and will, hopefully, make the appropriate adjustments in the near future.

Sincerely,