• Bill Bullock

2010 First Quarter

This past quarter has been a good one. As I have mentioned to some of you, we have had the wind at our back the last few quarters. This begs the question: what is going to happen to the stock and bond markets during a rising interest rate environment? I will let the enclosed first quarter 2010 returns speak for themselves and will use the space of this letter to write about some of my thoughts looking forward.


As everyone knows by now, it is not a question of if interest rates are going to go up, but a question of when and by how much. We know that intermediate bond prices will fall to a greater extent than short-term bonds when rates begin to rise. That is not a huge concern for us since it has been our philosophy all along to keep the fixed income side of things conservatively invested. This means that we have always over-weighted short-term, high quality bonds. Therefore, I am not too concerned about our fixed income weightings at this time, but will continue to monitor this situation in the months to come.


The outlook for the stock market is, of course, uncertain. As everyone knows, anything can happen in the short-term. However, I am going to go out on a limb and suggest that the next 10 years will be better than the past 10 years. The average return for the stock market since 1926 is approximately 10%. I expect that the slightly negative returns that we experienced this past decade will revert back to this positive mean in the years to come.


There are some, however, that would argue that the United States is taking on too much debt and that this debt will cast a dark shadow on the economy and the stock markets for years and perhaps generations to come. First, my counter argument would be that diversification plays a key role. Depending upon the portfolio, 20-30% of your equities are invested in foreign stocks and 40-50% of the revenue from the S&P 500 index funds is derived from overseas. Second, I have constructed your portfolios to be bottom-up - not top-down. I don't try to highlight a particular hot sector or country. I let the fund managers - who in many cases are closer to the action than I am - choose where to place your hard earned money. Third, your equity exposure is tilted towards value investing. In other words, our mutual fund managers purchase stocks when they are selling at discounts compared to their intrinsic value. Many times, our fund managers will not purchase a stock unless it is selling at a 30-40% discount. While the economy might falter during difficult times, the stocks within our value funds should hold-up better due to this "margin of safety". This type of investing has proven itself time and again...just ask Warren Buffett.

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