First Quarter, 2004

The first quarter of 2004 has presented a continuation of virtually all the political, economic, and investment market trends of the prior year.  Financial markets remain extraordinarily high priced; trade and budget deficits continue to worsen; the war on terrorism is becoming increasingly global (and costly); and the backlash against free-trade agreements appears to be growing in the U.S.  Against this backdrop of looming storm clouds, domestic and international stock markets continue their bullish advances.  Investors are focused on optimistic assumptions about the future, and the types of patterns and trends we worry about in our quarterly letters continue not to manifest themselves in the performance of equity markets around the world. 

The consensus seems to be, as aptly stated by one market observer, that "a problem is not a problem until it is a problem.  Then, it’s a problem."  

There have been no significant structural changes in our clients' overall portfolios during the first quarter.  The bond portfolios continue to have a short- to intermediate-term structure.  The inflation/deflation battle remains unresolved.  Until a clear pattern on this issue emerges, we will continue to "straddle the fence" with the structure of client bond holdings.  A portion of the bond portfolio will benefit if inflation re-emerges.  Another portion will benefit in a deflationary environment. 

Stocks as a proportion of clients' entire portfolios remain at or near the low end of their asset allocation range.  We continue to stress dividends in our effort to boost portfolio cash flow.  Tech stocks in general remain extraordinarily high priced.  We continue to minimize these holdings. 

Warren Buffet laments the difficulty of finding reasonably priced investments in the 2003 annual report of Berkshire Hathaway.  He comments that "Our capital in underutilized now, but that will happen periodically.  It’s a painful condition to be in—but not as painful as doing something stupid."  By "something stupid" he means buying assets that are extremely overvalued.  Patience has become a key operative strategy at this time until investor optimism abates or interest rates rise.