Looking Into The Crystal Ball

As mentioned, we have not seen in the last twenty years the degree of investor fear and confusion that exists today. Investors used to refresh their computer screens every 20 minutes to view their increasing stock portfolios. Today they are having a difficult time opening their monthly statements. A recent American Association of Investors (AAII) survey showed 46.0% of participants were bearish, which is near the highest extreme (51.1% bearish - 1991) of the past 10 years. If bear markets end in the depths of pessimism, from a contrarian perspective this degree of pessimism is a more bullish than not.

Taking a page from the movie �Wall Street�, Michael Douglas (a.k.a. Gordon Gecko) said, �Greed is Good�. We would turn the tables on this and say �Fear is Good�.

Fear will keep you from hurting yourself and fear can harm you by paralyzing you to the point of complete inaction. Being fearful is commonsense. Courageously confronting fear is what separates winners from losers.

Fear is managed by knowledge, preparation and execution. Athletes in any dangerous sport minimize risk by knowing the physical, mental, emotional and strategic risk of their chosen endeavor. Athletes pursue a daily regimen of specific and intense training to physically and mentally prepare themselves for the rigors of their plight. They prepare a game plan for the strategic risk that is adversarial to their goal. This disciplined preparation process combined with excellent execution reduces the fear of failure and secures the athlete�s goals.

Our fear of a speculative bubble began in 1998 and was further confirmed in the mania of 1999. We were fearful of the speculation and obscene valuations widespread in the technology and internet sectors. In a contrary move, we began over-weighting the asset classes we determined to be the most under-valued. These were contrary at the time because they included value, small caps and international securities.

In addition we revisited the goals and risk tolerance of each investor. This strategic analysis of each investor�s fear level was and remains a central theme to our allocation of capital.

�So what do you think about the markets?� (or put another way, �What are you going to do about it?�) We cannot tell you how many times just in the last 30 days we have had this question posed from clients, friends, associates, cabbies, caddie masters and even our parents. Mass psychology is an amazing phenomenon!

Whether you have a full comprehension of it or not, you are living through the largest financial speculation in hundreds of years. The amount of wealth that was created on paper and subsequently lost has approached $50 trillion dollars! Historians will be writing about this period for hundreds of years to come.

�So what!�, you say, �I am not interested in history. I am interested in tomorrow and making money.�

So are we but one perspective on the past is important at this juncture. There are times when not losing a lot of money was more important than making a lot of money. We intuitively believed the stock market bubble and mania was not going to last. In many of our investment committee meetings over the last three years our overriding goal was just not to make big mistakes by participating in the speculative parts of the market. At this point we feel somewhat vindicated in this goal. The important part of this goal is that our clients have conserved more wealth then the average investor.

So what do we think? We think �

Stock prices are more volatile than business values. You must analyze both.

You should invest with good people in a good business for a good price (or find somebody who can).

You should diversify your risks.

Laws don�t guarantee morality; i.e. in the past, some businessmen have cheated and in the future some businessmen will cheat.

The stock market and all other markets are self-correcting. They have periods of excesses and shortages, euphoria and fear, gains and losses. They all revert to the averages over time.

Find an investment discipline that you understand. It will not work as well as you want all the time. Stick with it.

Investing should be simple but not easy.

Investing is not easy. You cannot be intellectually lazy. You must do your homework. You must have intellectual integrity.

Investment returns do not come in a linear fashion. Like an airplane that is off-course 90% of the time, investment returns cross over and below their long-term averages.

Here is what we are doing�

We continue to believe the priciest parts of the market and the worst business conditions are in the growth sectors. We will be reallocating Mid Cap Growth investments to Mid Cap Value.

The best performing asset class over the last two years has been Small Cap Value. We will be slightly reducing allocations (taking profits) in this asset class and reallocating to International Stocks.

We are increasing our International Stock allocation to 30% of the equity portfolio. International Stocks, especially small cap and emerging markets, based on fundamental valuations are the cheapest in the world. A weakening dollar, expatriation of foreign capital from the U.S. and improving global economic and business structural conditions will help elevate returns going forward.

We continue to maintain a short duration (one to five years) on our bond portfolios in anticipation of higher rates in the future. We are investing 90% of the bond portfolio in high-grade corporate bonds due to the yield premium offered over treasuries and CDs. Though there has been pricing pressure on the high yield market in the last six months, we continue to believe this sector warrants a 10% position in the bond portfolio and may enjoy a price rebound as corporate debt concerns are reduced.

During the last six months we have spent considerable effort meeting with managers and chief investment officers. We continue to believe that our manager choices are the best in the market place. More than ever, the insight and diligent work of these managers will provide value to your portfolios.

This has been a laboriously difficult period to be an investor. We are entering the third year of lackluster results in investor portfolios. The mass psychology of the markets is changing. This is being exacerbated by daily news of corporate fraud, accounting misrepresentations and declining stock prices. Capitulation and market bottoms are more a process than an event. We are working diligently to assess not only the opportunities, but also the risks that are present in this process. We will continue to selectively prune portfolios while sticking to the essence of our investment philosophy.

Now more than ever is a time that your understanding and comfort with your investment portfolio should be affirmed. We encourage you to call us should you have any questions or concerns about your portfolios.


J u l y 2 0 0 2

Looking Into The Crystal Ball As mentioned, we have not seen in the last twenty years the degree of investor fear and confusion that exists today. Investors used to refresh their computer screens every 20 minutes to view their increasing stock portfolios. Today they are having a difficult time opening their monthly statements. A recent American Association of Investors (AAII) survey showed 46.0% of participants were bearish, which is near the highest extreme (51.1% bearish - 1991) of the past 10 years. If bear markets end in the depths of pessimism, from a contrarian perspective this degree of pessimism is a more bullish than not. Taking a page from the movie �Wall Street�, Michael Douglas (a.k.a. Gordon Gecko) said, �Greed is Good�. We would turn the tables on this and say �Fear is Good�. Fear will keep you from hurting yourself and fear can harm you by paralyzing you to the point of complete inaction. Being fearful is commonsense. Courageously confronting fear is what separates winners from losers. Fear is managed by knowledge, preparation and execution. Athletes in any dangerous sport minimize risk by knowing the physical, mental, emotional and strategic risk of their chosen endeavor. Athletes pursue a daily regimen of specific and intense training to physically and mentally prepare themselves for the rigors of their plight. They prepare a game plan for the strategic risk that is adversarial to their goal. This disciplined preparation process combined with excellent execution reduces the fear of failure and secures the athlete�s goals. Our fear of a speculative bubble began in 1998 and was further confirmed in the mania of 1999. We were fearful of the speculation and obscene valuations widespread in the technology and internet sectors. In a contrary move, we began over-weighting the asset classes we determined to be the most under-valued. These were contrary at the time because they included value, small caps and international securities. In addition we revisited the goals and risk tolerance of each investor. This strategic analysis of each investor�s fear level was and remains a central theme to our allocation of capital. �So what do you think about the markets?� (or put another way, �What are you going to do about it?�) We cannot tell you how many times just in the last 30 days we have had this question posed from clients, friends, associates, cabbies, caddie masters and even our parents. Mass psychology is an amazing phenomenon! Whether you have a full comprehension of it or not, you are living through the largest financial speculation in hundreds of years. The amount of wealth that was created on paper and subsequently lost has approached $50 trillion dollars! Historians will be writing about this period for hundreds of years to come. �So what!�, you say, �I am not interested in history. I am interested in tomorrow and making money.� So are we but one perspective on the past is important at this juncture. There are times when not losing a lot of money was more important than making a lot of money. We intuitively believed the stock market bubble and mania was not going to last. In many of our investment committee meetings over the last three years our overriding goal was just not to make big mistakes by participating in the speculative parts of the market. At this point we feel somewhat vindicated in this goal. The important part of this goal is that our clients have conserved more wealth then the average investor. So what do we think? We think � Stock prices are more volatile than business values. You must analyze both. You should invest with good people in a good business for a good price (or find somebody who can). You should diversify your risks. Laws don�t guarantee morality; i.e. in the past, some businessmen have cheated and in the future some businessmen will cheat. The stock market and all other markets are self-correcting. They have periods of excesses and shortages, euphoria and fear, gains and losses. They all revert to the averages over time. Find an investment discipline that you understand. It will not work as well as you want all the time. Stick with it. Investing should be simple but not easy. Investing is not easy. You cannot be intellectually lazy. You must do your homework. You must have intellectual integrity. Investment returns do not come in a linear fashion. Like an airplane that is off-course 90% of the time, investment returns cross over and below their long-term averages. Here is what we are doing� We continue to believe the priciest parts of the market and the worst business conditions are in the growth sectors. We will be reallocating Mid Cap Growth investments to Mid Cap Value. The best performing asset class over the last two years has been Small Cap Value. We will be slightly reducing allocations (taking profits) in this asset class and reallocating to International Stocks. We are increasing our International Stock allocation to 30% of the equity portfolio. International Stocks, especially small cap and emerging markets, based on fundamental valuations are the cheapest in the world. A weakening dollar, expatriation of foreign capital from the U.S. and improving global economic and business structural conditions will help elevate returns going forward. We continue to maintain a short duration (one to five years) on our bond portfolios in anticipation of higher rates in the future. We are investing 90% of the bond portfolio in high-grade corporate bonds due to the yield premium offered over treasuries and CDs. Though there has been pricing pressure on the high yield market in the last six months, we continue to believe this sector warrants a 10% position in the bond portfolio and may enjoy a price rebound as corporate debt concerns are reduced. During the last six months we have spent considerable effort meeting with managers and chief investment officers. We continue to believe that our manager choices are the best in the market place. More than ever, the insight and diligent work of these managers will provide value to your portfolios. This has been a laboriously difficult period to be an investor. We are entering the third year of lackluster results in investor portfolios. The mass psychology of the markets is changing. This is being exacerbated by daily news of corporate fraud, accounting misrepresentations and declining stock prices. Capitulation and market bottoms are more a process than an event. We are working diligently to assess not only the opportunities, but also the risks that are present in this process. We will continue to selectively prune portfolios while sticking to the essence of our investment philosophy. Now more than ever is a time that your understanding and comfort with your investment portfolio should be affirmed. We encourage you to call us should you have any questions or concerns about your portfolios.

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The opinions expressed in this report are those of the author and are not necessarily the same as Howe Barnes Investments or its research department. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Howe Barnes and/or its affiliates may have an interest in, or from time to time trade or make markets in, the securities of issues discussed herein. Member of New York Stock Exchange Member Securities Investor Protection Corporation