(text of email sent 11/20/08)

Since our last bulletin, virtually all asset classes have continued their worldwide decline.  While we all have been victims of this decline thus far, we believe that market prices have reached levels at which historic opportunities exist.  These opportunities are available only to those investors with (i) investment horizons longer than a few years* and (ii) the resolve to withstand considerable continued volatility — and the possibility of yet further declines — in the interim.  These two characteristics have accurately described you, and the overwhelming majority of our clients, to this point.  If you feel that either of these characteristics no longer applies to you, you need to let us know immediately.  Otherwise, we feel that it is time for you to take advantage of your situation and exploit the exceptional opportunities presented to you by investors less well situated than you.

Let us be clear.  We intend to keep you invested — that is our role.  We have not, for example, set pre-established market limits at which we will exit the capital markets.  If you no longer wish to be invested, you should let us know and we will honor your request in a timely and orderly manner.

We are taking specific actions to make the most of the current opportunities, some of which may appear atypical of us.  Therefore, we want you to understand the key premises upon which these actions are based:

  • Economic news throughout the world continues to be dismal, but the global economy and the capital markets are two different things — and the markets tend to anticipate both positive and negative changes to the economy many months in advance.
  • The foundational assumptions (primarily, the lack of correlation among certain asset classes) upon which our finely-tuned asset allocations are established — and which have held true throughout most of the markets’ history — are in temporary suspension.
  • The underpricing of certain individual securities is too severe to be overlooked.
  • We thus find ourselves in one of the very rare (and, presumably, short-lived) times when Modern Portfolio Theory may be less reliable than pure experienced-based insight and informed judgment.  While these latter considerations have always been present in our asset allocations and other investment decision-making, we are now bringing them more prominently to the fore.

Specifically, we are taking the following actions:

  • Equities — We have identified a number of specific stocks that, based on their fundamentals (in particular, their low leverage, substantial cash position, healthy free cash flow, and, in most cases, high and reliable dividend yield) are, in our view, significantly and irrationally underpriced.  In other words, they have been submerged, along with most other securities, in the tsunami of panic, fear, and forced selling that has overwhelmed the market — but we believe they have more buoyancy than most other stocks and will rise more quickly and robustly.  Some of these stocks are in industry sectors that have not been part of our strategic asset allocation, but for the reasons cited above we are not deterred by that at this point in time.  We are adding these stocks to portfolios large enough to accommodate individual securities, and we may be substituting them for broader-based sector index funds in the process.
  • Alternatives — As explained in our earlier bulletins, we have exited international real estate and have let domestic real estate and commodities remain near the low end of their range around our target allocations.  We are now formalizing this by decreasing our target allocations to real estate and broad commodity index funds, increasing our allocations to timber and managed futures, and adding allocations to agriculture and infrastructure as and when appropriate.
  • Fixed Income — We are exploiting the low pricing of, and the resulting outsized yields on, high-grade corporate bonds by continuing our move into investments with a sizeable allocation to such bonds.  This is being done in IRAs and other tax-deferred accounts for the most part; we are continuing to use municipal bonds and equivalents in taxable accounts, as appropriate.
  • The above actions are being undertaken within the parameters of the Investment Policy Statement you have directed us to follow on your behalf.

It has been said that bear markets are those times when securities are returned to their rightful owners.  Your time is now.    As always, please call us with any questions.

Your Team at Brinton Eaton

* Investment horizon is the time over which you expect to actually spend the majority of your investment portfolio.  Investment horizon is not, for example, the time left until retirement.  Unless you are well into your 80s and/or in failing health, and you do not intend to leave an estate, your investment horizon is measured in decades.