As we look back at the past year, we recall a few bright spots and quite a bit of tragedy, uncertainty and confusion. There were a number of life ending natural disasters including the massive 9.0 Japanese earthquake and tsunami which killed more than 10,000 people. We witnessed tremendous political upheaval throughout northern Africa and the Mid East as well as the inability of our own government to agree on a federal budget, leading to a US credit rating downgrade from AAA to AA. European debt levels reached crisis levels ultimately putting the Euro currency in jeopardy. We mourned the passing of Steve Jobs and celebrated that of Osama Bin Laden. Meanwhile social unrest related to poor economic conditions began in Greece and eventually spread to the US through Occupy Wall Street.

These events caused tremendous volatility in financial markets. In late August stock prices — depending on which index one chose to view — were down 20-35%. As of this writing the Morgan Stanley World Index (MSWI) is down almost 10%. Keep in mind that the MSWI is approximately 50% US stocks with the balance reflecting stock indexes across the rest of the world including Europe, Asia and South America. Since we invest for you around the world, this is the most relative index to our work. US stock indexes are relatively flat as of this writing, as are your US stocks.

As you know, in late July and early August, we significantly reduced the risk of your portfolio by selling stocks that were vulnerable to economic weakness such as industrial, consumer discretionary and technology shares. Since that time, this has significantly reduced the volatility of your portfolio relative to stock indexes. Though your rate of return is an important measure of performance we, as well as most professional investors, believe that your portfolio's level of volatility is an important measure of overall performance. This year positive investment returns were hard to come by. However, we were able to significantly minimize your overall volatility and mitigate the risk of catastrophic loss. Of course, if markets continue on this volatile path, this "recipe" should continue to benefit you. However, if the tragedies and confusion of 2011 dissipate, markets should act better and we will change our current — more conservative — strategy.

What would it take for our team to be more growth oriented? A number of events which include (1) a positive change in our leading economic indicators and those of our research partners (2) the possibility of a conclusion to the European debt crisis (3) a significant decline in stock prices that reflects all of this potential trouble. According to our work, one or all of these changes may begin to take shape within the next 2 quarters. Of course, the potential emergence of a US presidential candidate with a "grand plan" would also be helpful. However, we won't hold our breath for that one! In any case, when a more constructive environment exists, we stand ready to adjust your portfolio accordingly.

On a final note, we continue to hold more money market balances than normal to protect your portfolio from the ongoing volatility. This has been a short term strategic position. Given that global economic growth will eventually be more consistent — however subdued — it is likely that interest rates may stay low for some time to come. Therefore, over the next month and quarter, you will notice that your money market balances will be significantly reduced in favor of fixed income with a bit longer maturity and also with some foreign exposure. As well, we will continue to seek great global companies that are profitable and pay significant dividends. If you would prefer that we do not incorporate these strategies for your portfolio please let us know.

As always, please let us know if you would like to get together to review your portfolio or if your circumstances have changed. We hope this update finds you well and from all of us, we wish you and your family a very safe and happy 2012.

Sincerely,

James E. Demmert
Managing Partner