September 26, 2001

September 26, 2001

Please let us begin by saying that the prayers and sympathies of all of us here go out to those impacted by the terrible tragedy of September 11, 2001.

As individuals and as a nation we suffered a grievous loss. Now is the time for mourning and healing, but in our view, this time will eventually give way to a new and better era for the U.S. and for the world.

I am happy to report that our performance for your account has been much better than the market. For the quarter through yesterday the average account is about even. The world and the U.S. are undergoing economic transformation. The technology spending-led investment bubble is giving way to a much more rational economic and investment environment. War, and talk of war, brings sobering thoughts. The world and the markets were already sobering up from the e-commerce investment bubble and the recent terrorist attacks create even more thoughtful appraisal of investment values.

The public is realizing that fundamental analysis is the most appropriate way to value stocks. As a result of the sell-off of the last 18 months the U.S. market and many foreign markets are becoming much more reasonably priced. Today, we are able to find numerous high quality companies selling at price to earnings ratios that are substantially below their expected five-year growth rate. For example, company A sells at 10 times 2001 earnings per share and is expected, according to our research, to grow 20% per year for the next five years. The name of this investing style is often referred to as “Growth at Reasonable Price” (GARP) and it has been our style for more than thirty years. This investing style works by studying both value and growth characteristics in a systematic way.

The U.S. market is beginning to look more attractive than it has in years. We are favoring industries which are not technology based and which are not impacted by the war effort. Although we are not buying yet, we are carefully selecting companies for investment when the selling abates probably about the end of 2001. Some examples of where we are looking are:
Banks and financial institutions (except insurance), consumer non-durables, medical technology, pharmaceuticals, electronic toys, HMO’s and hospitals, and some specialized retailers.

The market may continue to drift lower or consolidate and move sideways until year-end or possibly into early 2002. However, in our opinion, the vast majority of the decline has been experienced in most market sectors. The exception is technology. In this sector the earnings continue to decline, yet valuations still are at up to 60 times earnings, and we believe growth rates for the next five years will not exceed 20%. Given this scenario, many technology stocks remain overvalued even after having declined precipitously.


Currently, foreign markets are becoming more attractive. Though they, too, may become targets of terrorist attacks, it appears most extremist groups view the U.S. as the major enemy and as such, U.S. assets and U.S. individuals, the preferred targets.

Those foreign markets that export to the U.S. will be damaged and those that compete with the U.S. will be benefited. We are closely reviewing major European and Asian companies in medical and financial sectors for investment.

For many years the U.S. dollar was the world’s preferred currency. Japanese and Europeans were attracted to the dollar because of: (1) the U.S. global superpower status, (2) our budget surplus, (3) the perceived invulnerability of U.S. financial institutions and (4) interest rates that were higher than were available in Japan and equal to those in Europe.

Today, all four strengths are no longer as visible. We remain a superpower, but we are now perceived as vulnerable, our budget surplus will disappear and be replaced by a deficit and eight cuts by the Federal Reserve have left U.S. interest rates below European levels. Accordingly, the U.S. dollar has begun to decline somewhat after two and a half years of steadily increasing versus the Euro and the Japanese yen. We expect the dollar to continue to weaken modestly versus these foreign currencies in the coming six months. We do not believe that the decline will be precipitous, but rather modest and slow.

Precious metals have not performed well recently inspite of the terrorism and war pronouncements. This is because asset based commodities such as oil are declining in value due to the economic slowdown and attendant decreased demand. Soon an economic expansion will follow the current fear based economic contraction. When this expansion arrives it will be partly based on the unprecedented flood of liquidity that the Federal Reserve, European Central Banks and the Japanese Central Bank have recently injected into the global economy. It is possible that this will sow the seeds of inflation. The monetary expansion of the ’90’s led to the high-technology bubble of the late ’90’s. We will be watching carefully where this current massive liquidity bubble creates excesses.

If it creates inflation, then hard assets (oil, gold, real estate) will be the correct area for investment, as we learned in the 1970’s. If productivity rises instead of inflation, stocks in growth industries and even technology may become attractive again, as was the case in the 1990’s.

We are happy to report that our clients have fared well this year even while the S&P 500 is down 23.3% and the Nasdaq down 39.2%. We see opportunity in many steadily growing low-priced companies and are awaiting to acquire them during periods of market weakness.