4th Quarter Update
As 2005 enters its final weeks, financial markets recently caught a bit of an updraft as late summer gloom over hurricanes, fuel prices, and difficult political issues gave way to an incipient optimism that the American economy had withstood a number of tough hits and kept chugging along. Energy-related shares came back to earth, but their decline was overshadowed by greater gains in financial, industrial, and retail shares. Client accounts have, for the most part, bounced nicely from October levels, and cont'd to outperform market averages. We continue to think that financial stocks, with their outsized dividends, make great sense here, as do well-managed industrial companies. Companies in the materials and transportation area also look to be good values as energy costs come down and economic activity remains buoyant. Healthcare, technology and real estate investments round out most client portfolios, but we have largely abandoned the media sector (with the exception of Viacom pending its breakup), as the online juggernaut and technological change put traditional media companies at risk.

This brings to mind the art and strategy of finding promising investments with good value and limited risk. Often the market will overreact to company or industry headlines and ignore more lasting and relevant factors. This was the case with many of our best investments in energy last year, and finance and transportation this year. Things just were not that bad. Other times, however, as in the media sector, seemingly good values can mask industry transformation that puts a rebound into serious doubt. When that happens a value investor must acknowledge the truth and move on. Hopefully, the value approach, with its margin of safety, will limit the scope of losses. Avoiding large losses, however, is just part of the equation. Our aim is to constantly find investments with value that is under appreciated by the market, with real potential to climb meaningfully in a reasonable period of time. Stocks in sectors undergoing a lasting transformation, with the sweep of technology going against them, usually will not measure up.

The year's results thus far also point out an observation about the science of building a diversified, balanced portfolio. Simply stated, most of the time not everything will go up at once, as nice as that would be. For example, when energy prices hit their peaks in August, transportation and industrial companies were knocked down. For portfolios with extra cash or too much exposure to energy companies, this was the time to take advantage of the weakness to buy those depressed companies . This was more than a short term move, however, as we only wanted to buy shares in companies with the wherewithal to be industry leaders that could continue to create shareholder value well into the future.

We leave you with our continued commitment to be your eyes and ears in the financial markets, looking for opportunities as well as traps, and being constantly vigilant in the quest we all have for financial security and peace of mind.
- posted by Jay @ 1:50 PM