When you bought Mutual Funds from us, most of you selected the “Deferred Sales Charge” option.  This means that if you make a withdrawal within 6 or 7 years of the original investment date (depending on the company), you will have to pay a withdrawal charge.  Each company allows you to withdraw 10% each year without a penalty. This 10% does not carry over from one year to the next. Use it or lose it!

When you come to the office for your annual review, we always transfer this 10% to a fund without any deferred sales charges.  This is recommended, as it will build up your available “free money” for future use.  For those of you who didn’t come in this year, we are doing our best to send forms by the end of the year. 

Please contact us if you haven’t received forms from us yet and ensure to return these forms right away to allow enough time before the deadline of December 31.

Last week we were worried about rampant inflation with too much government stimulus and this week we are worried that a correction may be underway as a result of not enough government stimulus; this after several weeks of amazing gains.  One thing is for sure, no matter what happens, we are going to be worried about something. 

The recession is far from over.  We are going to get more bad news which will continue to send jitters to the markets around the world.  If any correction is underway, it is normal after such a sharp and fast run up.  If you remember, no one anticipated the markets to start turning around before fall 2009 or even 2010.  This was a very fast run up after the deepest drop in a decade.  I think it is likely that we will see a very volatile summer and some drops before the recovery continues.  The markets never go up in a straight line , but again no one knows for sure.  Thus the importance to remain calm and focused.  Warren Buffet says that the number one reason for his investing success is his emotional stability.

In any event, the biggest threat, the one we must plan for, is inflation.  That is much more of a threat than a few more months of volatility.

As the governments around the world, especially the US, continue to pump money into the economy, some inflation is inevitable. Most economists don’t expect inflation to arrive anytime soon. But nobody really knows when it will appear or how bad its effects will be. In the meantime, we are suggesting that investors make sure that their portfolios are well positioned to w eather the impact of inflation to come.

We don’t see inflation as a problem this year and even perhaps for 2010, and some deflation is more probable in the short term. But inflation is a factor that we need to plan on. That doesn’t mean making radical changes to your investment portfolio. It means incorporating some classic inflation hedges—like commodities, real estate and making sure your fixed-income investments have relatively short maturities.

We recommend shorter-term fixed-income investments, because bonds with long maturities are most affected by rising interest rates.  Bonds can be a disaster in inflationary times.  People think that bonds are safe and can’t suffer a loss. This is wrong.  When interest rates rise, bond market value drops.  The longer the bond term, the bigger the drop. It can be quite shocking to see your “safe” investment drop in value.

It is also time to add commodities to your portfolio.  Commodity investments tend to perform well when there’s inflation because rising prices usually mean a stronger economy. That leads to increasing demand for raw materials to meet rising production and consumer needs. Don’t be tempted to make individual bets on oil or gold. Instead, buy a diversified basket of commodities.

We suggest 5 to 10 percent of a portfolio in commodities. Given commodities’ volatility, investors need to rebalance their portfolio periodically to make sure their position doesn’t balloon.

Real estate can also be a good way to hedge against inflation. Real estate investment trusts, which invest and own commercial and residential properties, are an easy and liquid way to gain access. Not surprisingly, REITs, which are required to distribute most of their income (generally from rent rolls) to shareholders, have been battered in the downturn. But they have shown signs of hitting bottom, and might be a good time to start building a position.

If you did not see us recently for a review, you will be receiving a portfolio review in the mail.  We want to ensure that your portfolio is well positioned for the recovery and inflation down the road.

Each year, the world riches man, Warren Buffett and his partner Charlie Munger hold the shareholders meeting for Berkshire Hathaway in Omaha, Nebraska. Given their legendary status within the industry, this “Woodstock for Capitalists” is one of the most highly anticipated events of the year, and Terry and I had the privilege of attending. Due to the global economic recession, punishing capital markets and its impact on investment portfolios, this year’s attendance was a record 35,000 people. In today’s increasingly complex world, Warren and Charlie’s common-sense approach to investing is a refreshing change and a philosophy that guides my recommendations and advice to you.

Here are some of the best quotes and comments made during the 6 hour meeting. Please remember that Warren Buffet is now 78 years old and Charlie Munger 85.  They are still running the business and making all investment decisions.  Here are few questions and quotes from the meeting:

What is required to be a good investor?

Buffett: You have to know how to value a business and how to think about markets. When looking at businesses, stay within ones that you understand. When thinking about markets, remember they are there to serve you, not to instruct you.

Munger: From an academia perspective, there is too much nuttiness in the way investing concepts are being taught today, reduce the nonsense.

Buffett: You don’t need to be a genius to be a good investor. If you have an IQ of 150 sell 30 points to someone else. You need emotional stability and inner peace with your decisions. Investing is simple, but not easy - remember ‘a bird in the hand is worth more than two in the bush’.

I am 11 years old, how will inflation impact my generation?

Buffett: The government is following a process that will have some inflationary consequences but the burden of government debt can be lowered by inflation. The best protection for you is your own earning power - be the best at what you can be. And invest in businesses with earnings power that are not heavily reliant on capital.

Munger: Young man, become a brain surgeon and invest in Coca-Cola.

You have identified four investment managers as possible candidates to be your successor. Can you tell us how they did last year?

Buffett: Just to be clear, we have three candidates to succeed as CEO, and they are all internal. There are four possible investment successors, both internal and external. In 2008, the four investment managers did no better than match the S&P 500 (down over 35%). A lot of things didn’t work, but they all have great 10-year records. 

Munger: Last year, everyone got creamed.

Other quotes:

· Look at expectation not current price. Look at shares you bought like the property you bought.

· Efficient market theory is non-sense. Markets are not efficient because of the emotional instability of investors.

· Current market lows will prove to be very temporary. Investing is all about cash flow,retained earnings and competitive advantage. The opportunities now are far greater than anything we have seen in years.

· Charlie Munger: At 85, the older I get, the more optimistic I become about the future. Don’t know when things will get better. Overtime things will get better. We have a system that works.  It is a mistake to think about the probable misfortune. One must also look at the probable positives.

In the same line, someone else said, :” I’m an optimist because I have never met a rich pessimist”

To conclude, while we are in the midst of a spring rally, one can not help but feel elated and relieved. Please remember however that the economic recovery will be slow.  While markets move ahead, we will sure see more down days and gut wrenching volatility.  Please remember these few words of wisdom when these event occurs. 

Let us worry about your investment choices and portfolio mix. We will be sure to practice the emotional stability needed to stay focused on the value investment choices we have made for you now and the future.