March 6, 2009

Dear Investor,

The stock market continues to fall, dragging our portfolios down with it. In just 2 months this year, the S&P 500 has lost more than 18%. As Warren Buffet recently wrote, the economy is in freefall. Major companies are having major problems, credit markets are dysfunctional, governments around the world are in disarray and confidence is shot. Is there any hope?

Warren Buffet also wrote that America’s best days lie ahead. So there is hope for the long term. It’s the short term we’re worried about.

The nation’s problems are formidable and have been building for some time. Unfortunately, the solutions are only beginning to be administered. It’s a quirk of fate that the financial crisis struck during a time when the outgoing administration was in lame duck status and the incoming administration was struggling to get its feet on the ground. Bailouts to date have served to keep insolvent institutions alive, but they haven’t addressed the root of our problems – the increasing number of home owners defaulting on their mortgages, the crippled state of highly leveraged financial institutions with toxic assets on their books, and the consequent plunge in confidence throughout the economy.

The recently passed $700 billion stimulus bill, poorly designed though it may be, is a start. Next in line is the TALF program, which will attempt to revive the securitization of $1 trillion worth of new investment in auto loans, credit card receivables, student lending and possibly some commercial mortgages. This money should begin to flow by April. Just this week, the Obama administration put forth a plan to alleviate pressure on millions of homeowners via mortgage interest relief. Lastly, unspent monies in the TARP program are finally being earmarked to backstop private sector investments in the toxic assets presently held by banks. No one can guarantee that these are the solutions to our economic problems. But it is a relief to us that the medicine is finally being administered to the patient. The main lesson of the 1930’s is that doing nothing deepens the decline and prolongs the agony. We are hopeful that some of what is finally being done will work.

Unfortunately for investors, the results of these new economic initiatives won’t be known for some time, and most investors don’t seem to be in a mood to wait and see. Thus weakness in stock prices continues.

We have been doing what we can to help investors. Contrary to the long term nature of our investment philosophy, we have sold many stocks that we felt might be negatively impacted in the short term by problems in the economy and the credit markets. Though our portfolios have suffered greatly in recent months, it would have been far worse had we not sold as many stocks as we did. The companies we continue to hold are generally doing well in their businesses, but the market doesn’t seem to care for now.

We wish we could express some optimism at this point but, unfortunately, circumstances don’t permit that. This bear market will end but we’re not sure when. Stocks may well slump somewhat further before it’s over. They may not, but they could. A lot depends on the success of the new government programs in halting or restraining the slide in the economy and in restoring the confidence of investors.

On the other hand, many stocks are very cheap. Owning them now might entail some near term risk, but barring an economic catastrophe, returns over the next few years could be quite good. Investors willing or able to ride this out could ultimately be well-rewarded.

A brief word here about FIM. As others in the investment world, we are introducing some necessary changes. We are reducing our salaries, which were never extravagant in the first place. We have always been generous in waiving or reducing management fees for investors whose portfolios were not producing profits. Upon evaluation, we have determined that we must charge a minimum fee for all portfolios, even if all or most of the portfolio resides in cash. Even though we may not be investing as actively as in the past, our work in research, client service and administration continues. We are moving cash out of low yielding money market funds to insured money market CDs yielding up to 0.5% and to short term bond funds yielding about 3%. Income from these investments won’t be much, but it will more than cover whatever management fees we charge. The real payoff will be down the road when we can reinvest this money in equities with potential for high returns. If any of you prefer to withdraw cash from our managed portfolios we will certainly understand, but the decision on when to reinvest that money will be yours, not ours.

On a more optimistic note, dysfunction in the credit markets has resulted in the opportunity to invest in reasonably safe securities at extremely attractive yields. These are preferred stocks of real estate investment trusts yielding between 10% and 15%. We have recently been adding these to income oriented and balanced accounts and plan to purchase some in growth accounts that are not currently fully invested.

As always, we’re doing our best to accommodate or exceed your investment objectives during these difficult times. Please don’t hesitate to let us know how we can best serve you.

Yours truly,

Jeff Friedberg
Terry Ledbetter
Jonathan Reichek