Looking into the Crystal Ball

�Every trend goes forward forever until it ends!�

� John Neff

�All we can ever do is look at the past to predict the future, but life is dynamic and constantly changing, so the assumptions governing predictions are bound to be wrong.� � Leon Levy

If predicting the future was as positively related to the past as some may have you think, then predicting the events of Tuesday should be as easy as knowing the events of Monday. We don�t know about you but if most of our Tuesdays, or for that matter any other day of the week, were like Mondays we are not sure life would be quite as optimistic!

Over the holidays we watched a symphony orchestra with great awe. The sixty+ members with a wide variety of instruments produced some of the most melodic and inspiring music we have heard. We were amazed at the timing and placement of so many different musicians that created one beautiful piece of music.

The investment process can be like a symphony in its intricacy, complexity and inspiring value. When you think of all the variables that can affect one stock or investment, e.g. management, unions, competitors, regulators, commodities, distribution channels, advertisers, accounting, tax laws, economic conditions (local, regional, national, global), etc. it is amazing analysis is even possible. It is even more amazing when all the cosmic tumblers of the world click into place and the majority of these factors align themselves in the most favorable way possible. And, it is most unbelievable when only one or two of these factors can undermine a perfectly good business plan and investment.

The investment decision-making process requires a great many skill sets that must be coordinated to create one beautiful plan for making your money grow. In some ways it requires the resourcefulness and intuition of a jazz musician who must be able to improvise with the changing conditions. In other ways it requires the discipline and patience of an orchestral member who may only provide a few notes within a twenty- minute arrangement. Creativity and discipline, art and science, precision and intuition, though distinctly different, are inseparable in a good investor and their plan.

Why all the flowery analogies and what is the point? The point is that in the 90�s we went through a period of time where making money appeared easy. Though few people actually earned and kept significant returns on their investments, the perception was that it was easy nonetheless. Investing well is not easy. And in our opinion, not only will the perception that investing is easy diminish, the nuts and bolts of making money is going to be more difficult. It is going to require more creativity, more research will be required to find fewer opportunities and dispassion and discipline will be needed in their highest forms.

Many people are experiencing investor�s fatigue. That is the current trend in the markets is lasting longer and is more emotionally fatiguing than they are built to withstand. One of the difficulties with investing is how long it sometimes takes for investment ideas to prosper. It is ironic that an individual can devote years or a lifetime of achievement to building a career or a business and yet grow tired of an investment or investment or plan within days, weeks or months.

The average holding period for a stock by a retail investor is less than one year. The average mutual fund is held less than 2 � years. The illusion of liquidity that the markets offer may actually be a great disservice to the average investor. The instant gratification world we live is fostered in part by the internet. Many investors assume they are one �click� away from wealth.

Wealth is not created by trading.

Wealth is created and preserved by building investment plans and portfolios.

This investor fatigue can additionally be explained in great part by investor�s most recent experiential factors. For example:

* 30 Bull Markets have occurred in the past century.

* 7 Bull Markets have lasted more than 1000 days.

* 3 of those 7 have been in the last 17 years.

* Until the current Bear Market (second longest in history), the Bear Markets of the last 17 years were some of the shortest on record (e.g. 90-120 days).

That all adds up to a lot of good and not much bad for a long period of time. That leads to over-confidence and unrealistic expectations.

What trends and opportunities do we think will unfold in the coming decade? Why should an investor remain committed to our investment plans?

* US demographics are highlighted with an aging population and a higher savings rate. This is a long-term trend that will slow consumption and capital investment and normalize corporate profits and equity returns in the foreseeable future.

* High levels of corporate and personal debt will limit GDP growth and capital investment contributing to normalize corporate profits and equity returns.

* We purported in a previous newsletter that large cap domestic equity classes would experience below average returns for the foreseeable future and we still believe this to be true; 6-8% annualized returns.

* Small Stocks will enter a period of out-performance relative to Large Stocks. Contributing factors will include a regression to the mean of the cyclical underperformance; the flexibility and additional leverage potential of smaller companies and the investor preference for accounting and financial transparency made easier in small company balance sheets and income statements.

* The US dollar has entered a secular phase of easing against foreign currencies. Foreign investment in the US, which has more than doubled since 1995, will be reduced in part by this dollar-easing trend.

* On a large scale, China, India and Russia will experience the fastest GDP growth rates in the world. China is currently the 6^th largest GDP in the world. It is predicted to be the 3^rd largest in five years and could become the world�s largest in a decade. Global capital flows will seek out business and profit potential in these areas.

* In 1970 the US represented 66% of the globe�s market capitalization. In 2000 the US represented only 51% of the world�s market cap. Of the 500 largest companies in the world 59% are non-US companies. Higher growth rates, more investment opportunities an a cyclical reversion to the mean will lead to foreign stock market out-performance in the coming decade.

* Due to the rapid economic growth, infancy of business skill and regulation, and the non-democratic political structures, emerging markets will be volatile. It will be imperative to employ managers with vast experience to navigate these opportunities in a proper risk/reward fashion.

* Interest rates will enter a secular move to higher rates. In the short run, i.e. 2003, rates will remain near current lows. But when the prevailing rhetoric is worries of inflation the Fed will begin tightening. We do not expect it to resemble the hyper inflationary environment of the 1970�s.

* Commodities have been in a long-term underperformance period. Renewed inflationary growth and increasing global demand for materials to build economic infrastructures will create a secular move of out-performance. This in turn will put further pressure on higher interest rates.

How do these trends lend themselves to our current investment policy and asset selection?

* Due to our reduced expectations for Large Cap performance, we are over-weighting experienced value/blend managers who focus on buying undervalued companies. Capital Guardian Trust, Clipper, Dodge & Cox, Tweedy Browne, Longleaf Partners, Harris Associates, Davis, Marsico, etc. all incorporate thorough fundamental research, long-term investment themes and risk-adjusted performance in their management and care of your assets.

* Regarding Small Stock allocations, we currently are allocating approximately 25% of equity portfolios to Small Stocks when you combine Small/Mid Cap allocations. Small stocks often have fewer analysts following their stories. It is a more eclectic and inefficient market when it comes to analysis. It is a more intimate environment since management is smaller and key officers or employees can provide substantial leverage to the business. Intuition plays a great role in small stock analysis. Our recommended managers in this area, Baron, Wasatch Advisers and Royce Associates, have average manager tenure of over 20 years managing small company investments.

* Regarding International Stocks, we have approximately 30% of an equity portfolio allocated to this asset class. There is a blend of Large Cap Core (20%), Small Cap (6%) and Emerging Markets (3%). Capital Guardian Trust, Longleaf, Tweedy Browne, Harris, Putnam, Brandes and Templeton have extensive experience managing foreign investments. Several of the organizations have managed foreign stocks for over 30 years.

* Regarding Fixed Income, due to our belief that interest rates are at the bottom of a long-term trend, we remain committed to managing 5-6 year bond ladders. The improved liquidity in these short-term ladders will protect the total return of the bond portfolios and limit reinvestment risk. Where applicable we have approximately 15% of the fixed income portfolio in High Yield Securities. With an improving economy and the risk perception in credit markets being reduced, these securities may enjoy a period of above average performance.

There are over 10,000 mutual funds and over 20,000 equity securities available to the investing public and institutions. Add in to this mix insurance company investment products, commodities, hedge funds, etc. and the investing landscape can be overwhelming. We have spent 20 years narrowing our investment recommendations to approximately 35 funds and 20 management firms.

In a recent interview Jack Welch, the retired Chairman of General Electric, was asked what one piece of advice he would give to the future business leaders of tomorrow. His answer was he would develop in them the ability to analyze the unintended consequences of their decisions and actions. Though confident about the choices and plans we have implemented for our investors, our experience has humbled us, and taught us to expect, and attempt to anticipate the unintended consequences. What we know for sure is, �We don�t know what we don�t know.� However, we do believe our research and discipline are properly positioned for providing prudent and profitable long-term wealth building.


	J a n u a r y 2 0 0 3

Looking into the Crystal Ball �Every trend goes forward forever until it ends!� � John Neff �All we can ever do is look at the past to predict the future, but life is dynamic and constantly changing, so the assumptions governing predictions are bound to be wrong.� � Leon Levy If predicting the future was as positively related to the past as some may have you think, then predicting the events of Tuesday should be as easy as knowing the events of Monday. We don�t know about you but if most of our Tuesdays, or for that matter any other day of the week, were like Mondays we are not sure life would be quite as optimistic! Over the holidays we watched a symphony orchestra with great awe. The sixty+ members with a wide variety of instruments produced some of the most melodic and inspiring music we have heard. We were amazed at the timing and placement of so many different musicians that created one beautiful piece of music. The investment process can be like a symphony in its intricacy, complexity and inspiring value. When you think of all the variables that can affect one stock or investment, e.g. management, unions, competitors, regulators, commodities, distribution channels, advertisers, accounting, tax laws, economic conditions (local, regional, national, global), etc. it is amazing analysis is even possible. It is even more amazing when all the cosmic tumblers of the world click into place and the majority of these factors align themselves in the most favorable way possible. And, it is most unbelievable when only one or two of these factors can undermine a perfectly good business plan and investment. The investment decision-making process requires a great many skill sets that must be coordinated to create one beautiful plan for making your money grow. In some ways it requires the resourcefulness and intuition of a jazz musician who must be able to improvise with the changing conditions. In other ways it requires the discipline and patience of an orchestral member who may only provide a few notes within a twenty- minute arrangement. Creativity and discipline, art and science, precision and intuition, though distinctly different, are inseparable in a good investor and their plan. Why all the flowery analogies and what is the point? The point is that in the 90�s we went through a period of time where making money appeared easy. Though few people actually earned and kept significant returns on their investments, the perception was that it was easy nonetheless. Investing well is not easy. And in our opinion, not only will the perception that investing is easy diminish, the nuts and bolts of making money is going to be more difficult. It is going to require more creativity, more research will be required to find fewer opportunities and dispassion and discipline will be needed in their highest forms. Many people are experiencing investor�s fatigue. That is the current trend in the markets is lasting longer and is more emotionally fatiguing than they are built to withstand. One of the difficulties with investing is how long it sometimes takes for investment ideas to prosper. It is ironic that an individual can devote years or a lifetime of achievement to building a career or a business and yet grow tired of an investment or investment or plan within days, weeks or months. The average holding period for a stock by a retail investor is less than one year. The average mutual fund is held less than 2 � years. The illusion of liquidity that the markets offer may actually be a great disservice to the average investor. The instant gratification world we live is fostered in part by the internet. Many investors assume they are one �click� away from wealth. Wealth is not created by trading. Wealth is created and preserved by building investment plans and portfolios. This investor fatigue can additionally be explained in great part by investor�s most recent experiential factors. For example: * 30 Bull Markets have occurred in the past century. * 7 Bull Markets have lasted more than 1000 days. * 3 of those 7 have been in the last 17 years. * Until the current Bear Market (second longest in history), the Bear Markets of the last 17 years were some of the shortest on record (e.g. 90-120 days). That all adds up to a lot of good and not much bad for a long period of time. That leads to over-confidence and unrealistic expectations. What trends and opportunities do we think will unfold in the coming decade? Why should an investor remain committed to our investment plans? * US demographics are highlighted with an aging population and a higher savings rate. This is a long-term trend that will slow consumption and capital investment and normalize corporate profits and equity returns in the foreseeable future. * High levels of corporate and personal debt will limit GDP growth and capital investment contributing to normalize corporate profits and equity returns. * We purported in a previous newsletter that large cap domestic equity classes would experience below average returns for the foreseeable future and we still believe this to be true; 6-8% annualized returns. * Small Stocks will enter a period of out-performance relative to Large Stocks. Contributing factors will include a regression to the mean of the cyclical underperformance; the flexibility and additional leverage potential of smaller companies and the investor preference for accounting and financial transparency made easier in small company balance sheets and income statements. * The US dollar has entered a secular phase of easing against foreign currencies. Foreign investment in the US, which has more than doubled since 1995, will be reduced in part by this dollar-easing trend. * On a large scale, China, India and Russia will experience the fastest GDP growth rates in the world. China is currently the 6^th largest GDP in the world. It is predicted to be the 3^rd largest in five years and could become the world�s largest in a decade. Global capital flows will seek out business and profit potential in these areas. * In 1970 the US represented 66% of the globe�s market capitalization. In 2000 the US represented only 51% of the world�s market cap. Of the 500 largest companies in the world 59% are non-US companies. Higher growth rates, more investment opportunities an a cyclical reversion to the mean will lead to foreign stock market out-performance in the coming decade. * Due to the rapid economic growth, infancy of business skill and regulation, and the non-democratic political structures, emerging markets will be volatile. It will be imperative to employ managers with vast experience to navigate these opportunities in a proper risk/reward fashion. * Interest rates will enter a secular move to higher rates. In the short run, i.e. 2003, rates will remain near current lows. But when the prevailing rhetoric is worries of inflation the Fed will begin tightening. We do not expect it to resemble the hyper inflationary environment of the 1970�s. * Commodities have been in a long-term underperformance period. Renewed inflationary growth and increasing global demand for materials to build economic infrastructures will create a secular move of out-performance. This in turn will put further pressure on higher interest rates. How do these trends lend themselves to our current investment policy and asset selection? * Due to our reduced expectations for Large Cap performance, we are over-weighting experienced value/blend managers who focus on buying undervalued companies. Capital Guardian Trust, Clipper, Dodge & Cox, Tweedy Browne, Longleaf Partners, Harris Associates, Davis, Marsico, etc. all incorporate thorough fundamental research, long-term investment themes and risk-adjusted performance in their management and care of your assets. * Regarding Small Stock allocations, we currently are allocating approximately 25% of equity portfolios to Small Stocks when you combine Small/Mid Cap allocations. Small stocks often have fewer analysts following their stories. It is a more eclectic and inefficient market when it comes to analysis. It is a more intimate environment since management is smaller and key officers or employees can provide substantial leverage to the business. Intuition plays a great role in small stock analysis. Our recommended managers in this area, Baron, Wasatch Advisers and Royce Associates, have average manager tenure of over 20 years managing small company investments. * Regarding International Stocks, we have approximately 30% of an equity portfolio allocated to this asset class. There is a blend of Large Cap Core (20%), Small Cap (6%) and Emerging Markets (3%). Capital Guardian Trust, Longleaf, Tweedy Browne, Harris, Putnam, Brandes and Templeton have extensive experience managing foreign investments. Several of the organizations have managed foreign stocks for over 30 years. * Regarding Fixed Income, due to our belief that interest rates are at the bottom of a long-term trend, we remain committed to managing 5-6 year bond ladders. The improved liquidity in these short-term ladders will protect the total return of the bond portfolios and limit reinvestment risk. Where applicable we have approximately 15% of the fixed income portfolio in High Yield Securities. With an improving economy and the risk perception in credit markets being reduced, these securities may enjoy a period of above average performance. There are over 10,000 mutual funds and over 20,000 equity securities available to the investing public and institutions. Add in to this mix insurance company investment products, commodities, hedge funds, etc. and the investing landscape can be overwhelming. We have spent 20 years narrowing our investment recommendations to approximately 35 funds and 20 management firms. In a recent interview Jack Welch, the retired Chairman of General Electric, was asked what one piece of advice he would give to the future business leaders of tomorrow. His answer was he would develop in them the ability to analyze the unintended consequences of their decisions and actions. Though confident about the choices and plans we have implemented for our investors, our experience has humbled us, and taught us to expect, and attempt to anticipate the unintended consequences. What we know for sure is, �We don�t know what we don�t know.� However, we do believe our research and discipline are properly positioned for providing prudent and profitable long-term wealth building.

Back		Continue




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