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Quarterly Letter to Clients

January, 2004

Indices at quarter-end (Dec. 31, 2003):

Dow Jones Industrials: 4Q'03 +12.71% YTD +25.32%

Standard & Poor's 500: 4Q'03 +11.64% YTD +26.37%

In a recent Dilbert cartoon, the boss asks the employee, “Will there be any unforeseen problems?”

Ah, if only we could foresee the unforeseen.

Certain things we are able to foresee with some certainty. Take greed: without it there would be no scandals, no steady stream of misdeeds, and writing these letters would be that much more difficult. It seems that every quarter there is another indignity heaped upon the investing public. They serve to lubricate my keyboard and they provide fodder for humorists.

The miscreants du jour are the mutual funds. Large, previously well-regarded firms like Putnam, Janus, Strong, Invesco, Pilgrim-Baxter, Alliance, Federated and others have been caught in actions that are often illegal, and when not technically against the law, are certainly morally unsupportable.

Among the investing public there are a number of other foreseeable traits upon which we can depend. For example:

The natural human tendency is to believe that whatever conditions currently exist will continue to exist. That is, when markets are going up, we think they will go up forever.

We tend to believe that if we are making money in a particular security that we will continue to make money in it.

We tend to believe that if we lost money in a particular investment, that it will never be a good investment, and that we are likely to lose money again should we ever dare to venture into that same security.

We tend to believe that low interest rates will remain low (or vice versa).

These are emotional reactions, and they are neither rational nor true, but, like greed, they are a universal human trait.

Of course, the best we mortals are likely to be able to do is to foresee possible pitfalls and try to insulate ourselves from them. We also try to foresee possible beneficial items and profit from them.

And then, of course, we run into the unforeseen problems.

Thus far, the markets have been able to shrug off the scandals, the falling dollar and the rising public debt and go on to record very healthy gains for the year. Both bonds and stocks were strong in the year just ended, across the board, with the more speculative elements in each category providing the most dramatic gains.

The economy seems to be picking up steam, and, at last, jobs. It is no wonder, what with our government pumping cash into the system, holding interest rates at very low levels and employing many thousands of our youth in military positions.

Actually, the wonder is that it took so long to grab hold. The question is whether the gains in the economy, and by extension the markets, can continue.

I am not sanguine about the new year. I am as vigilant and concerned as ever. But as I have said on many occasions, it is my job to worry. I just hope there will be no unforeseen problems.

I wish you a happy, healthy and prosperous New Year.

Jim Pappas