4th Quarter 2009 Quarterly Letter to Clients

2009 was quite a year. We had one of the best years for the stock market in the last decade, but who would have guessed that last March? Back then, we wrote that stocks were due for a bounce, and boy what a bounce we got. We never expected a move of the magnitude we experienced, so we will chalk that up as a pleasant surprise—our favorite kind!

But as we look back over the year, we were generally cautious (and we still are). While we never moved out of the market, we also were not aggressive enough buyers last winter and spring. In retrospect, we held onto too much cash. Our goal is to protect our clients’ capital, and as stocks rapidly rose last year, we expected a pullback that never came. Our caution left us holding cash waiting for cheaper prices. We still are!

What has been interesting is that we are finding more intriguing ideas today than we have in several months. It is not because we have lowered our standards, but because there are quite a few companies that missed out on most of the market run up or who have seen a large improvement in operating performance. Our caution on the market and economy has not diminished, but we build stock portfolios one company at a time and there are still opportunities out there.

In the case of the mutual funds we use, we have faith that the managers will also remain disciplined. And we have to point out that a number of the mutual fund managers we invest with had stellar 2009 performance.

In addition, two of our managers – David Herro at Oakmark International Small Cap and Bruce Berkowitz at Fairholme won Morningstar’s Manager of the Decade awards for Foreign and Domestic equities, respectively. Mr. Berkowitz also was named the Domestic Equity manager of the year. We would also point out that over ten years ending 12/31/2009 the S&P 500 index returned negative 1% per year--the lost decade that so much has been written about. However, every one of the funds we use generated a positive ten year return (if they had been around for the entire decade).

As impressive as this past performance has been, we know it guarantees nothing. It does, however, reinforce a portion of our mutual fund selection process: we look for managers that utilize an understandable process which has successfully grown their investors’ capital over time. We plan to keep selecting mutual fund managers the same way and sincerely hope it continues to produce similar results.

The bottom line is that there are good investments available, but you just need to be careful and disciplined. We think that is true in any market environment. Our cash holdings have us ready for opportunities presented by the market. To quote Bruce Berkowitz: "cash becomes quite valuable under adverse conditions.”

We wish all of you a happy and healthy 2010. We intend to work hard on your behalf and remain available to help you with any financial matters. Please feel to contact us anytime with questions or concerns.