Looking into the Crystal Ball

"Investors repeatedly abandon a sensible wealth-building strategy just because it is not generating short-term results, and almost without fail, give up on it at precisely the wrong time."

"If you are not willing to own a stock (investment) for 10 years, do not even think about owning it for 10 minutes."

Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one night stands a romantic."

For all the pain-staking effort, intellectual exercising, technical and fundamental analysis that is conducted by individual and professional investors alike, investor behavior seems to be the ultimate contributor to the success or failure of investors. Do your emotions override your sensibilities, your disciplines and instincts in times of risk and fear or return and greed?

In a March 2003 interview in Kiplinger's Magazine Chris Davis, manager of the Davis New York Venture and Selected American Funds, describes how even large apparently sophisticated investment committees fall into these traps.

Why care whether investors stick around? - Kiplinger's

"Ken and I want to outperform the S&P by a couple of percentage points a year over the course of our careers. But that won't benefit investors if they leave at the first sign of trouble. Case in point: I sit on the investment committee of a charity. In the past ten years the committee has hired two investment managers. Each time they chose a reputable well-known firm with a very good five-year track record. So they began with one firm, replaced it after it trailed its peers for three years in a row and did so the second time after that manager trailed its peers for three years. If they had picked the worst of the three and stuck with the firm all ten years, the charity would have added 2.5 percentage points a year to its return. Had they picked the best, it would have benefited by five percentage points a year. So those two changes cost the charity $17 million - and this is a sophisticated committee. Now they are replacing the third firm because it, too, has under performed."

"�Cambridge Associates looked at managers who were in the top quartile in total return ten years ago. Of those, 98% subsequently under performed for at least three years in a row, relative to others who follow a similar style. And 68% of them fell into the bottom quartile three years in a row."

So what's an investor to do? - Kiplinger's

"I said to my fellow members of the committee: This time let's accept as a fact that whomever we choose to manage the charity's money will stink for three years, maybe longer. So what we need to do when we go through the hiring process is to determine up front what it is that will give us the conviction to stay with the firm. It can't just be an above-average record for the previous five years. We need to go deeper into how this manager works."

At Private Client services we would contend this same philosophy applies at its basics to the difference between investors and savers, the purchase of an individual investment and the investment discipline the investor employs on a daily basis. One of the difficulties with the investment business is the dynamic changes it undergoes. Macro economic factors, governmental policy, individual business risks, personal circumstances and an unlimited number of other factors go into affecting each investment decision made. Most of these factors individually do not experience the rate or degree of change that the markets experience. It is the market's participants and their reactions (behavior) that account for the tremendous swings in stock prices. Publicly registered stock prices are much more volatile than the private market valuations attached to them.

The S&P 500 Index has grown at an average annual rate of 10.20% for the 77 years 12/31/26 through 12/31/2002. However, as you are aware, this has not been in a linear fashion. Surprisingly, the market has returned at or about its average rate of return; i.e. +/- 2%, only 4 years out of 77 or 5.20% of the time.

Annual Returns	Range of Returns	# of Occurrences	% of Occurrences
-20% +	-43.34% to -22.10%	5	6.50%
-20% to -12%	-14.69%	1	1.30%
-12% to -8%	-11.89% to -8.07%	11	14.30%
-8% to 0%	-7.16% to -0.41%	6	7.80%
0% to 8%	0.47% to 6.57%	10	13.00%
8% to 12%	10.08% to 11.92%	4	5.20%
12% to 20%	12.45% to 19.75%	10	13.00%
20% +	20.34% to 53.99%	30	38.90%
TOTAL		77	100%

The table highlights the volatility that the stock market has experienced. This obviously does not make the process of choosing managers and or investments any easier if you are easily influenced by the dramatic changes. Depending on a manager's investment style or the type of investment discipline one uses, it is easy to be either a hero or a goat based on performance in the short-term.

The question any investor should ask themselves in the present is "Is my capital properly allocated to provide assurance that reasonable return of capital will be earned commensurate with the risk I am taking." Based on the above table, in any given year, 70% of the time an investor can expect a return on his capital of 0% to 54%. What the table doesn't show is that if you measure returns over rolling periods; i.e. 3 years. 5 years. 10 years, etc., the probabilities increase that you will earn a return on capital (more assurance) and the range of results is narrowed (less risk).

Though the last three years have been disappointing for investors based on absolute returns, the long-term aspects of wealth accumulation cannot be ignored.

� Cash has beaten stocks and bonds in only 12 of the past 77 years, according to Ibbotson and Associates.

� $1 invested from 1926 through December 31, 2002, grew to $17.48 if invested in cash (T-bills), but $1,775 if invested in stock (the S&P 500).

We continue to believe that our clients balanced portfolios of stocks, bonds and cash; our strategic and tactical asset allocation; and our rebalancing discipline have provided great value during the treacherous markets of the last three years. It is our belief that the stock market is trading in a current range that may have placed its bottoms last October. At current levels we are continuing to allocate capital to the equity markets with those managers which with we have the strongest conviction. We are in the midst of a longer term market that will be highlighted by a narrow trading range where stock picking and prudent fixed income management will be rewarded. We are confident in the positioning of your capital and the improvement in returns on capital that we are expecting with a slowly improving economy.