Quarterly Newsletter – March 2001

We are currently experiencing the most severe stock market downturn since the 1970’s. The high point of the broad market was March 24, 2000. Since then the S&P 500 is down more than 20%. The Russell 2000, a measure of US Small Cap stocks, is also down about 20%. The technology heavy NASDAQ is down a staggering 60%. In the last year about $4 trillion of wealth has been erased. As a percent of GDP the market losses are twice as large as the 1987 crash! Many of your friends and neighbors, who bet big on growth stocks and scoffed at diversification a year ago, have become very quiet.

Our clients, on the other hand, have hardly noticed the bear claws, except to read about them or hear about them at dinner parties. Just imagine how you would feel if you had recently lost 40% or 50% of your net worth. Some of your friends and neighbors have. You, however, have not.

This is diversification at work. We have beaten this drum before, and will do so again. In March of 2000 we said, “Vast sums are leaving the value funds and flowing into the hot stock funds.…We have, as you know, always held that doing so is a losing game.” Since then U.S. Large Value is up 35% and technology stocks are down 60%. And from our June 1999 letter – “Financial markets are characterized by a simple fact – nothing lasts forever.”

But, you say, NASDAQ investors earned 90% in 1999 before the current 60% loss. Aren’t they better off, by about 30%? In fact 90% up followed by 60% down means big losses. An example will illustrate. $1000 invested at 90% for one-year grows to $1900. $1900 that loses 60% results in a $760 ending value or a loss of $240 from the original $1000. This is a 24% loss over two years!

Many investors are now dumping growth stocks, throwing them away at any price. With our rebalancing discipline, we will be buying them.

Are we implying that diversified portfolios will never have substantial losses? Of course not, but as we said in March 1999, one of the risks of Diversification Management is the risk of looking different. That risk is paying off in spades. Your portfolio performance is looking very different from that of most other investors. Enjoy it.

Dean and Jim