Investment Perspectives -- January, 2004

This is just a little note of gratitude for the trust you continue to place in us. The last few years have been very trying times for most investors. Many have been badly burned and some permanently scarred. But we persisted in our belief that good companies make good investments over the longer term, and we are succeeding at restoring the health of our portfolios.

The market has a way of keeping the majority of investors off balance. Though I accurately predicted in my last letter (August 1, 2002) that the bear market was "…grinding to a close" I have been surprised at the extent and persistence of the recovery to date. The question of the day is "will it continue?"

In short, I think it will, but at a more gradual pace and with occasional interruptions. There is little doubt that the US economy is in a recovery phase along with the economies of most countries. Corporate earnings will be strong in 2004 and beyond. Investors, frustrated with low returns on CDs and money market funds, should continue to funnel dollars into the financial markets. These positives should outweigh negatives like a weakening dollar, relatively high equity valuations, the threat of terrorism, and potential investor "over-exuberance". But the market advance will be tempered, and eventually truncated, by rising interest rates. Interest rates may not increase much in the next few quarters, but they will elevate eventually and we must remain alert to the threat posed by rising rates.

Jeffrey L. Friedberg