May 29, 2009

Housekeeping, Evolution, and a Prediction

Dear Investor,

The market has bounded upward lately, buoyed by the realization that we are not going to repeat the experience of the 1930s. In a moment, I'll venture a guess as to what lies ahead.

First some housekeeping. The privacy of our client's information is of utmost importance to us. Enclosed with your statement is a copy of our privacy policy. Our ADV Part II, the disclosure document required by the Securities and Exchange Commission, is now available for distribution. If you would like a copy, please call or email our office. Your accounts are being managed according to the goals you specified on your most recent Account Objective form. If you wish to discuss or change your investment objectives, please contact our office. Due to market turmoil the IRS has decreed that there will be no minimum distribution requirement for tax-deferred accounts in 2009.

Like most organizations, FIM continues to evolve. In order to recognize the increased capabilities, experience and maturity of our staff, I have decided to form an investment management committee. The committee will consist of Jonathan Reichek, Alan Brochstein, Monica Carmody and me. Jonathan and Monica are experienced employees of FIM and Alan is a consultant whom we know well and have worked closely with for some time. In the past, it was I who made all significant investment decisions for most of our managed portfolios. In the future, it will be the committee. I very much look forward to working more closely with this group of highly capable individuals who, not coincidently, have the same investment philosophy as I do.

Now for the prediction (trumpets, please) -- the bear market has finally ended! That may be a bit of an overstatement, but I want to stress that it is time for investors to jettison the bunker mentality that has prevailed for the last several months. I don't expect a new bull market to start just yet, but we are now likely in a transition phase between the old bear and the new bull. This transition may take some time, as the economy will take a few years to regain its footing. But the important consequence is that the next major move in the market will be upward and that I think it will happen within the next 3 years. After past bull market peaks, recovery time through a bear market to new market highs has averaged about 2 years. This bear market was a particularly nasty one, so let's assume that this recovery will take a lot longer, say 8 years. That would result in new highs for the market by 2015. An advance for the Dow from the present level of 8500 to a record of 15000 in 2015 would imply an average annual return of approximately 10%. This is hypothetical, of course, but it puts into some perspective the magnitude of the returns that may lie ahead. Most investors would be quite satisfied with these. And the returns would be even greater if the market were to reach new highs prior to 2015 or if our stock selections were to outperform the market. There will surely be numerous air pockets ahead, but I think the overall investment trend will be distinctly positive.

At FIM we manage portfolios for a broad spectrum of investors, from those seeking growth to those seeking income. Many of our growth investors may not realize that we invest in various income generating securities for the balanced, conservative and income portfolios that we manage. Opportunities for income available in today's market, as a result of last fall's shock to the credit markets, are unusually attractive by historical standards. Yields between 8% and 11% can now be obtained in a wide variety of relatively low risk securities. There are no guarantees or FDIC insurance but if the economy stabilizes and our investment choices perform as expected, we can realize yields on this order.

The bottom line is that I believe we are on the verge of a multi-year period during which investment returns should satisfy investors willing to assume some risk.

Some of you have requested that we hold a considerable amount of cash in your portfolios. I suggest that you now strongly consider letting us put that cash back to work. Money markets and bank deposits have rather low returns these days. In fact, if you have other moneys that you have withdrawn from the markets, or if you have friends or relatives who have done likewise, consider what we have to offer. We're happy to have discussions with anyone interested in investing, no matter the objective. New software, streamlined procedures and the efforts of Mona, Holly and Jenny have made our office more efficient these days and we can easily handle additional portfolios.

To quote Will Rogers, "Don't gamble; take all your money and buy some good stock and hold it 'til it goes up, then sell it. If it don't go up, don't buy it." Investing in an environment like this isn't quite that simple, but with a new bull market likely on the horizon, very attractive yields available on low risk securities, our new management structure and office efficiencies, we're in position to be of significant help to a wide variety of investors. If you would like to discuss how any of the above relates to your particular financial situation, please call or email us. A little dialog at a time like this may help a lot.

Yours truly,

Jeff Friedberg