This is another of those occasional updates that I issue as a supplement to the individual performance reports, investment policy statements and financial planning reports.
 
        The rates of return reflect the overall rate of return on all the funds that I have managed since 1981.
 

a. Statistics

1. Portfolio Management
 

 My goals with your money are really rather simple:

1. To invest wisely using a consistent approach that emphasizes balance and a longer term view.
2. To invest with a clear idea of your individual timetables of goals and needs and your individual feelings about risk.
3. To clearly and concisely and consistently tell you what to expect, what we are doing and why we are doing it.  A key to a successful management relationship is clear communication with no surprises.
4.  To be patient and to be calm during periods of turbulence.
5. To maintain a widely diversified portfolio.
6. To buy securities of all types at prices that represent a significant discount from their fair market values.

You can expect the following:

• The portfolio returns will be unpredictable over shorter periods of time.
• It is extremely unlikely that we will have significant losses and, even if we do, those losses will NOT be permanent.
• We will have losing years. That is part of the process.
• It is highly likely that we will attain our longer term goals for the portfolio.
• We will not significantly increase, or reduce, the level of risk in the portfolio without prior consultation.

        I wanted to re-emphasize that the returns in 2003 do NOT reflect a more aggressive and riskier posture. The portfolio continues to be managed using the same risk averse approach that we have employed over the last 23 years and that we will continue to employ for the next 23 years.

         As I said in my last report, I am finding it increasingly difficult to locate and purchase undervalued assets. Earlier this year bargains were plentiful in many asset classes although there were not, ironically, many bargains available in the favorite asset class of that period – bonds and bond funds.
 

        Highlights of the allocation are as follows:
 

a. The allocation to fixed rate bonds is the lowest it has been since the portfolio was created in 1981.  The odds do not favor a successful outcome for all of the money that has flooded into corporate and Treasury bond funds in 2003.

b. The allocation to common stocks is much reduced from earlier in the year when bargains were commonplace. We have our common stock money invested wisely, but too many of our holdings are now close to being fairly valued. On a net basis I am a seller although it would be unlikely that our common stock position would decline below 30% of the portfolio. Our International holdings are markedly cheaper than their domestic counterparts, but both sectors have seen significant price appreciation in the last six months.

c. We have 7.8% in the resource sector including our usual 5% allocation in gold. The latter has, once again, been an excellent contributor this year and we have been steady sellers to keep our gold position at, or below, 5%. This is our Armageddon insurance. :)

d. We are finding very few compelling opportunities where the possibilities of gain are significantly greater than the possibilities of loss. We will not take foolish risks with your, and our, money and we will not invest unless the odds are heavily in our favor.

3. Financial Planning

         As we have mentioned before we are striving mightily to minimize your recorded capital gains and dividend income in 2003 by various tax maneuvers and especially by concentrating on effectively utilizing any potential realized losses. The bad news is that losses are few and far between so our efforts to minimize taxes will only be partially successful this year. This is only mildly bad news as most people welcome the “problem” of having excess gains. :)
 
         We have sent out minimum distribution requests to those affected (if you are over 70½ and have not yet made IRA withdrawals) and we need those to be completed and mailed to Fidelity.

         We will contact you prior to the end of the year re 4th quarter estimated tax payments and also with any year end tax activities that we will recommend on a case by case basis. We will send out your annual investment policy statement in January and your annual financial planning statement in the spring.
 

4. Summary

          My expectations for the portfolio remain unchanged and they are that we expect in the medium and longer term to achieve a rate of return that exceeds the rate of inflation by 5% p.a. and that we expect to achieve this with muted volatility. This is a critical assumption in all of our financial planning and it forms the cornerstone of our financial planning summaries. We have met our targets, easily, in both the medium and longer terms and over the entire length of the portfolio. A look at the attached chart illustrates this point.

        All of our financial planning is predicated on two things – that the portfolio will earn a target rate of return that is measured by the dotted line on the chart and that, importantly, the pattern of annual returns are not exceptionally volatile (i.e. that the portfolio is not subject to significant fluctuations). The target rate of return is a rate of return that equals the rate of inflation plus 5% (e.g. if inflation is 3% p.a. the target rate of return would be 8%).  The lack of volatility in the portfolio is also a critical component in the successful accomplishment of our goals. The risks of volatility in a portfolio are covered in “Monte Carlo modeling” which measures the dangers of concentrating on an average rate of return and which shows, very persuasively, that the timing of any volatility is critically important in the success or failure of any plan. This is a lesson that many people have learned, too late unfortunately, in the aftermath of the bubble of the 1990’s.

         As I said in my last report, I am becoming increasingly concerned about some of the imbalances in the world economy and the effect that those imbalances (and the cures) might have on asset prices around the world. I believe that the next 12 months in the financial markets could be really quite interesting. :) I have no predictions about the 12 months except for the fact that they have the potential to be volatile and challenging, that it is extremely unlikely that we will earn returns that match 2003 and, most importantly, that we will work diligently and conservatively on your behalf.

        We appreciate your continuing support and we always appreciate feedback.  You can reach me at Crewel@ aol.com.