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:: January 2003 | Page 1 of
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Dear Clients and Friends,
GOOD RIDDANCE
As the caption above suggests, the passing of the year 2002
will not be lamented by investors. The improvement in market
statistics in the fourth quarter was not sufficient to rescue
a dismal year that already was well established by the end
of September.
We promise not to clutter up this letter with a recital of
dreary market data for the year. It is sufficient to say that
one has to go back decades to find analogous time periods
in which the U.S. equity markets performed as poorly. All
the major market indexes were down between 15% and 30%, winding
up a third consecutive down year for U.S. stocks. A losing
string of that duration has been seen only three times in
a hundred years, most recently in 1939-'41, as war clouds
were gathering in Europe. Equity markets elsewhere in the
world also suffered significant declines last year, leaving
all stock investors licking their wounds. Worth noting is
the fact that all major S&P sectors were in deficit territory
for the year.
Bondholders fared a good deal better, helped by the actions
of the Federal Reserve Open Market Committee in reducing interest
rates and by a significant flow of funds from stocks to bonds.
Over the years, we have had a strong preference for owning
some bonds in all individual portfolios, and that proclivity
was very helpful in containing the effects of the bear market
last year.
ANATOMY OF A BEAR MARKET
We have been close observers of the U.S. stock market for
an amount of time approaching forty years. During that time
period, we have seen a number of difficult environments for
equities and two major bear markets: 1973-'74 and 2000-'02.
In the interval prior to our tenure in the business, one had
to go back to the period following the stock market crash
of 1929 to find a similar, epic decline in stock prices.
Reflecting back on the two postwar bear markets prompts us
to offer several observations:
[1] Market declines of this severity are rare in U.S.
history and typically set the stage for very satisfying subsequent
returns. We can think of no good reason why this pattern
will not be repeated this time around, as we explain later
in this letter.
[2] Bear markets tend to follow exuberant bull markets,
typically characterized by investor fascination with some
sub sector of the market, to the exclusion of all other areas.
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