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:: April 2003 | Page 1 of
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Dear Clients and Friends,
STUCK IN PLACE
If you react to events the way we do, you also must have a
sense of being stuck in place, of grappling with concerns
that just seem to hang around without being resolved. For
most of us, confronting uncertain outcomes has a psychological
impact on the way we think about the future and the way we
view our investment strategies.
REVIEWING THE BIDDING
Before starting to write this letter to you, we read again
the comments contained in our missives of October 2002 and
January 2003. Most of the observations made months ago still
are relevant, but some of our perceptions have evolved, so
we want to focus on what has remained the same and what has
changed.
In the October letter, we offered the opinion that the conditions
for a market bottom had arrived by the end of the third quarter.
With respect to the economic slowdown, we pointed out that
recessions and quasi-recessions in the U.S. always are followed
by recoveries, sometimes with great resilience, sometimes
more muted, but always recoveries. We observed that managements
had given up on the idea of being bailed out by an economic
rebound and had become aggressive in cutting costs. This shift
in gears, accompanied by progressively easier year-over-year
comparisons, improved the odds of surprisingly strong earnings
results in due course for many mundane companies in unexciting
industries. We thought that equity valuations, while unappealingly
high to some analysts, nevertheless were at levels that could
sustain solid gains in stock prices. In making the argument,
we pointed to price/earnings ratios that were near long-term
median values, in an environment of very low interest rates,
which logically should favor high price/earnings ratios. By
last Fall, corporate scandals, management malfeasance, director
somnolence and accounting fraud were on the table. We wrote
of “wars and rumors of wars” in reference to a
determined pursuit by the U.S. of terrorists and of countries
that were ill disposed toward our nation.
All of these crosscurrents left investors with a high level
of generalized anxiety, amplified by the truly awful performance
of stocks in the third quarter. By the end of September, the
sense of crisis was broad and deep, sufficiently so as to
remind us of similar periods in earlier bear markets. The
depth of gloom resembled that which often accompanies a market
bottom.
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