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.

a. Statistics

          Details of the overall portfolio are as follows:   
 

        The main indices have declined between 3-6% since our last report. We are still in the midst of the third consecutive year of declines in all of the Worlds major markets and the declines, in their totality, exceed the level of devastation meted out in the savage bear market I personally experienced in the first half of the 1970’s. I believe the current market, like its predecessor, with 50% portfolio declines as a commonplace will have a similar chastening effect on its participants. It will be a long time before we witness any “irrational exuberance” in common stocks although, ironically, we may well witness similar craziness in other asset classes. Although the public has seemed to learn the lesson about common stocks it doesn’t appear, yet, to have learned some of the more fundamental lessons of investing. It may seem obvious, and endlessly repeated, but many people still do act as if past performance is a guide to future performance.

        I think that the “investors”, and I use this word loosely, pouring cash into bonds and bond funds are using this principle to guide them and that, in the medium and longer term, they will regret this almost as much as they did their love affair with common stocks.

        As for us the year to date return is -1.1% (Thursday 19th December 9.00 a.m.) which I am rather pleased with in this most difficult of years. I see nothing in the present, or in my perception of the future, that will alter our expectations that are a crucial part of the planning process. Two of our most critical assumptions are:
 

1. That we will, through time, earn a rate of return that exceeds the rate of inflation by 5% p.a. Our experience over the last 22 years has been better. In that period we have averaged 7.4% p.a. above the rate of inflation.

2. Variability in the annual rate of return is nearly as dangerous as poor absolute returns. This has been evident to any of the participants who were heavily involved in common stocks and poorly diversified over the last 3 years. It is, critically, not just the average returns earned over a period but also the volatility in those returns that will make for success or failure in a plan. Our diversified and balanced portfolio has exceeded my expectations over the period which included the following events in no particular order of magnitude:
a) The crash of 1987
b) The gulf war
c) Significant inflation in the early 1980’s
d) Various emerging market crises
e) The near financial meltdown with the collapse of Long Term Capital Management
f) The severe 2000 – 2002 bear market.

            One of the key strengths of our performance has been the muted volatility (the “sleep well” factor). The term “muted volatility” refers to the fact that the portfolio is not subject to savage declines and this characteristic has been well proven over the last 22 years.  Since inception in 1981 we have had 3 years of negative returns (this assumes that 2002 will, as seems likely, be negative) and our worst year in absolute terms was -4.5%. In 16 of the 22 years our returns have exceeded 9.5% p.a. We will be THRILLED if, looking back in 2024, the next 22 years show a similar pattern.
 

2.  Summary
 
        The first, and most important thing we want to say, is to wish everyone and their families a healthy and peaceful holiday season from all of us – Mike, Nancy Bassett and Nancy Cushing. I, Mike, want to thank you all again for your kindness and support in the period after the death of Jenny. I will not forget your kind, and thoughtful, words and actions.

        We continue to operate a balanced conservative portfolio and we expect to attain our stated targets in the next 22 years using the same risk averse methodology that we have employed successfully since 1981.

        As is always true I have no predictions regarding our expected returns in the next quarter or the next year but I do have confidence in our methodology which has been refined over the years but which is based on the same core beliefs that have guided the portfolio over its entire life. It can be expected that we will have negative returns in some future quarters and in some future years but they will have no impact on the attainment of our long term goals.

        My gut feeling is that 2003 will be another difficult year full of traps and snares for the unwary. I AM looking forward to a time when the markets are a little less treacherous :), but I am also aware that the rewards of the good years have to be earned by years of battling in the trenches during the difficult years.

        The next report that you will receive will be the annual report of performance which will be issued in the first week of January, 2003. In the middle of January we will send our routine letter gathering all of the tax data that we will need to complete your Schedule B and Schedule D forms for your tax returns. Your individual investment policy statements which will include, in significant detail, your individual portfolio returns will be issued later in January. Individual returns will, obviously, differ from the overall portfolio return based on a variety of factors including the age of the account; goals and ages of clients; attitudes towards risk etc. etc. Although there will be variability it will not be huge as all of the portfolios are managed using the same core beliefs and the same methodology.
 

        In simple terms, $100,000 invested in the portfolio on January 1, 1981 (without any further additions or withdrawals) would have grown to $844,000 at the date of this report.