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. Current Performance

        Details of the overall portfolio are as follows:

b. Portfolio

      The market returns of the main domestic stock indices this year are as follows:

        This data is never listed as a comparison to our portfolio as the two are very different animals with entirely different characteristics. The index data is listed because this is, for most individuals who invest, where they place the bulk of their money in combination with liberal amounts of cash in bank fixed interest accounts.

        Our portfolio is always balanced, and conservatively invested, and it is always less risky, usually by a significant margin, than the average portfolio. In the years ahead we will manage your money in an identical fashion to that which we have employed since 1981 – a conservative, value based, eclectic and innovative style of management.

        The portfolio has been in existence since May of 1981. We are in our 24th year. In the years since 1981 we have compounded the wealth of our clients at 10.9% p.a. The details of the individual annual returns are provided in our quarterly and annual returns and, of course, are recorded on our web site.
 
 

	Rate of Return	Inflation	Real Rate of Return
Returns 1981 – 2004	10.9%	3.3%	7.6%

 

        The real rate of return we have achieved (7.6% p.a.) compares very favorably with the long term returns available for the riskiest portfolios and, most importantly, we have achieved these returns without incurring significant risk. Our planning is based on the achievement of a real rate of return of 5% p.a. and we believe that this is achievable in the years ahead with the same approach that we have employed over the last 24 years (i.e. a sensible, risk averse and value based approach).

c. Taxation

        Traditionally in the 4th quarter we try to “harvest” our tax losses by executing tax motivated stock sales. The goal with tax loss selling is to reduce your taxable realized gains and, therefore, reduce your tax bill. My best guess, at this point, is that our tax loss selling this year will be fairly light as we are in the happy (?) position of having very few unrealized losses.

        The initial tax loss selling will start this week and it will explain anything that seems odd (e.g. why did Mike just sell that stock when he purchased it two months ago for quite a bit more money?)

        As always, when in doubt or if you have a question, don’t hesitate to call.

        We have now completed all of our mandatory IRA withdrawals for those of you over 70½ years of age.
 
        In the next week or so we will send out to you our final estimated tax suggestions but, prior to that, we will contact some of you to clarify YTD salary and self employment information. We will instruct you whether or not to accelerate the 4th quarter State tax payments (both Federal and State tax payments are due on January 15, 2005) by paying them prior to the end of 2004. The acceleration is often, but not always, a sensible tax planning maneuver as State taxes are deductible on Schedule A of your Federal tax return and they will reduce your 2004 Federal tax bill.
 
        Whether, or not, we tell you to accelerate your estimated State payment we may well ask you to accelerate other itemized deductions. We will specify the items that we think make sense and that are feasible.

d. Conclusion 

         I have, honestly, been quite surprised that we have, thus far in 2004, been able to navigate some rather tricky waters including an explosion in commodity prices, a rather alarming decline in the value of the U. S. currency and internal and external deficits that should be worrying SOMEONE in high places. I remain convinced that we have the probability (much higher than would usually be true) of extremely turbulent waters in the next 12-24 months. I intend to be appropriately cautious and if I am wrong in the outcome we will forgo some potential gains, but if I am right, or even partially right, we will avoid potentially large losses. If things do, indeed, get out of hand economically we will not avoid all losses, but we will live to fight again.

         My usual conclusion is worth repeating because this information, and its acceptance and understanding, is critical to our long term success:
 

• The portfolio returns are unpredictable over shorter periods of time.
• It is extremely unlikely that we will have significant losses and, even if we do, those losses would 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.
• Our investment management is carefully, and individually, integrated with our financial planning on your behalf.
• Investing is about probabilities and about avoiding major risks.
 
 
        Please call if you have any questions or concerns. We are always available and are happy to talk, answer questions and, hopefully, to provide useful advice and answers.