Investment Perspectives -- January, 2006

Dear Investor,

This letter has become an annual missive in which I assess investment prospects for the year ahead. I think the outlook is pretty decent, but more on that shortly.

This is the year I turn 65, an age when many persons retire. Some of you have asked about my future plans and plans for the company (FIM), so I'd like to take this opportunity to share my thoughts with you. I started FIM in 1979, not because I had visions of building a large investment firm but because I thought I had a talent that could be used to benefit others. With virtually no effort at sales or marketing, I am somewhat shocked (and humbled) that we have grown into a company employing 5 people and managing investment portfolios for more than 200 individuals. I'm certainly grateful to each of you for placing your trust in us, and to Mona, Terry, Monica, Holly, Elaine (my very supportive wife) and everyone else who has contributed to our success.

Getting directly to the point, I have absolutely no plans to retire. Though the calendar suggests otherwise, I still feel like a young man, I enjoy good health, and I don't mind the heavy work schedule. Over the years, I have come to realize enormous levels of satisfaction in helping many persons reach or exceed their investment goals, and this continues to be a major source of personal fulfillment. I simply relish the challenge of investing, and I would like to continue this journey as long as possible.

Doing so, however, will necessitate some changes. I find myself with more executive duties and less time to devote to research. I sense a need to share responsibilities with others in the office, to further develop and reward our present employees and to attract additional investment talent to FIM. Given my age, I think it would also be prudent to implement a contingency plan in the event I encounter some unanticipated health problem before other employees are fully prepared to take over management of the firm.

The path I have chosen to pursue will require an increase in our operating budget. With this in mind, we've recently compared our management fee structure with that of a number of other investment management firms. We have found that, on balance, we charge less than all of our peers. For example,

For other than small accounts, our maximum fee is 1% and the average is somewhat less. Translated into dollars, our annual fee for a $500,000 growth portfolio is presently $4,400. For a similar portfolio, other money management firms would charge between $5,000 and $7,500, the average mutual fund would charge $7,250, a typical wrap account at a major brokerage firm would charge $7,500 to $10,000, and a hedge fund achieving a return of 12% would charge more than $15,000. So it is clear to us that, except for sub-$100,000 accounts, our fee structure is below market.

Given our position in the market and the need to invest in FIM, we are going to adjust our fees. We haven't settled on the new fee schedule yet, but I can say that, though it will be higher for most investors, it will likely be lower for smaller accounts. The new fee structure will be implemented next month. Given the success we've achieved in past performance, I don't think anyone will find the new fee levels to be at all burdensome. If you think they might be, please share your thoughts with us. And even after the new fee schedule goes into effect, we will still have the lowest rates that we know of for individually managed accounts.

Getting back to the outlook for the stock market, I am relatively bullish. Following above-average returns during the '80s and '90s, I have been expecting this decade to exhibit sub-par returns. Indeed, since 12/31/99, the S&P 500 and the Dow are modestly lower, though broader market averages are somewhat higher. The average investment return in the stock market over the last 100 years or so has been approximately 10% per year. I would define a "sub-par" performance over a decade as 0% to 5% per year. So, if this decade were to end up with a 0% return, the market will essentially go nowhere for the next 4 years. However, if stocks were to achieve a 5% annualized return for this decade, they would begin 2010 approximately 60% higher than at present. That translates into an annual return greater than 12%. The bottom line is that even if I'm correct about this being a poor decade for stocks, we could see considerable upside from here over the next 4 years.

That said, my crystal ball doesn't have a clear image of 2006. I could write several paragraphs about the economy, but you can read similar comments elsewhere. In the interest of brevity, I will simply say that I think there will be growth worldwide, led by Asian economies, and most US corporations will benefit. If corporate earnings rise, as I expect, stocks should rise also. So, despite the threat of higher interest rates, higher energy prices, potential terrorism and political unrest, my expectation for stocks in the next year is for a return of somewhere between 0% and 15%.

We will devote this year to building a stronger organization and we will work hard, as we always do, to find the most suitable securities for your portfolios

Jeffrey L. Friedberg