August 12, 1997

The following are some thoughts on long-term investing.

We feel that the market is extremely top heavy. We are trying to invest in longer term, fundamentally sound companies and industries. We have passed on certain momentum investments which are not trading within long-term fundamental patterns. One example of this is Coca-Cola (KO). Our analysis of Coke shows it to be severely overvalued. Various indicators, such as price to cash flow, price to earnings and price to book are at unprecedented historic highs. We have been investing in a way to take advantage of price declines in the share price of Coke. Please contact us if you would like more insight on this.

Conventional wisdom from the securities industry tells us the following.

1. “You cannot time the market” – we agree with this for the most part. When markets are severely overvalued, asset allocation plays a stronger role. For example, our fixed income portfolios have been over-weighted as compared to equities. We still have specific equity exposure. We are convinced that the next bear market will bring prices down in most equities (and bonds for that matter). One must understand and be comfortable with maintaining a long-term approach when investing in equities, especially when a fundamental and value approach is used. History CAN predict when markets are overvalued!

2. “You will always come out ahead if you invest for the long term” – We disagree fully with this conventional wisdom.

When stocks have been purchased when price earnings (P/E) levels have been 19 per share or greater, the average 10-year annualized return has been under 3%. This includes reinvesting dividends.

The average S&P 500 p/e is more than 23 times per share at the moment. The average P/E at the end of a bear market is about 8 times per share.

The average portfolio returns when equities which were purchased at the end of bear markets have been over 15% annualized.
We are concentrating in areas that will hopefully limit the severe losses of bear markets. We have been concentrating in companies such as:

1. Occidental Petroleum (OXY)

2. AT&T (T)

3. Placer Dome Inc. (PDG)

4. Cable companies (for more aggressive portfolios)

5. China (a lot of short to intermediate-term risk).

This is a list of themes we have been invested in, yet due to price increases, we are waiting for hopefully more realistic levels before we continue to invest in these ideas.

1. International food and food distribution companies

2. High technology agriculture companies

3. Oil exploration

4. Water companies

5. Companies involved with Digital Video Disks (DVD)

Well, that is a synopsis of some of our investment thoughts and ideas. We would very much like to hear from you. Many of you are already using our investment management services (we greatly appreciate working with all of those individuals). We are looking to grow our business and would be thrilled to speak with you. If you would like to be taken off this mailing list, please inform us and we will take care of it.

Very truly yours,