COMMENTARY - 2ND QUARTER 2008

“In looking back on my 42 year career, the only serious regrets I have suffered were those occasions when I failed to encourage clients to stay the course during down markets.”

– Michael Golub, Founder of Golub Group

Summertime is here, and summer means baseball. Given that baseball is often viewed as a metaphor for investing (e.g. “that stock was a home run”), we offer our investment perspectives within the context of our national pastime.

“It ain't the heat, it's the humility.” – Yankee great Yogi Berra

Attempting to navigate the difficult market environment over the past several months has certainly been a lesson in humility to us all. Yet even under the heat of the tough markets, we are reminded of the ballplayers who could best handle the heat. Ted Williams is commonly regarded as one of the best hitters to ever have played in Major League Baseball, and the last hitter to bat over .400 in a season. That is to say, for every ten at bats, Mr. Williams enjoyed 4 successes and 6 failures. While that doesn’t sound impressive on the surface, the sheer paucity of players that achieve that batting average at any point in the span of their careers speaks to the difficulty of attaining such a remarkable achievement.

We find many similarities when it comes to investing. Like most major league baseball players, we will have our fair share of strikeouts, fly outs, and ground outs, but we also have our fair share of singles, doubles, triples – and even home runs. At times, some of our holdings might trail the broader market or remain out of favor to Wall Street and the investing masses. Our charge, however, is to produce consistent investment results over a long time period – in essence, to maintain our batting average over time.

In baseball, a disciplined approach to offense advances runners and scores runs. Our disciplined approach to investing is designed to produce consistent performance results over a long period of time and at lower risk. Looking at the recent performance of our holdings of financial services stocks, one might think our approach is suspect or at least that we’re mired in a batting slump. The important consideration to note is that investing – like successful hitting – requires patience, and we are confident that if we demonstrate patience with our portfolio holdings, we will be well-rewarded in the future. We do not attempt to time market peaks or valleys, and thus we cannot precisely predict when the performance of certain portfolio holdings will improve. We only know that at some point they will return to favor and reward us – just like baseball fans celebrating a team on a winning streak.

Scoring runs is one key to winning at baseball, while another is preventing runs by the opposing team. For instance, we scored runs by investing heavily in the energy sector earlier this decade, an investment which is still paying dividends for our clients today. But we also played defense, for example, by selling Washington Mutual back in 2006 when we became concerned about deterioration of credit quality and lending standards in the mortgage industry, and by selling Citigroup as the sub-prime mortgage crisis began to unfold in the third quarter of last year. After our sale, Washington Mutual subsequently lost over 80 percent of its market value, while Citigroup has since lost roughly 60 percent of its own market value.

We also took care not to get caught up in the frenzy of buying that took place as capital flowed into various emerging markets last year with little regard for risk or valuation, having warned our clients about those markets in several of our past quarterly commentaries. The decline in the U.S. stock markets since the beginning of the year has of course been notable, but the decline in several emerging markets has been even more severe, with India’s SENSEX index down roughly 36 percent, Hong Kong’s Hang Seng index down roughly 20 percent, and China’s Shanghai A-shares index down over 50 percent year-to-date.

Of more recent concern to us is the potential for a bubble brewing in various commodity sectors, as evidenced by the parabolic nature of some of the commodity index price charts. And with the specter of commodity-linked inflation at front and center among the list of concerns voiced in today’s financial media, we seek to own those companies like General Electric, for example, that combat the rising costs of inflation through their own degree of pricing power.

“The future ain’t what it used to be.” – Yogi Berra

Should you watch Major League Baseball’s All-Star Game this month, to be held at New York’s Yankee Stadium, you will no doubt see numerous tributes to the great players who once wore Yankee pinstripes, including Lou Gehrig, Mickey Mantle and Roger Maris. We’d ask you to pay even more attention to the changing make-up of today’s All-Stars. There are a record 246 foreign-born players in the major leagues today, including stars Chien-Ming Wang, Kosuke Fukudome and Manny Ramirez. As you take note of the increasingly international flavor of baseball, you will see why we are so optimistic about the ongoing globalization occurring today and the prospects for our companies to benefit from continued global growth and wealth creation abroad. You will also understand why we are excited about what it means for your portfolio of investments both now and in the future.

The winners in the increasingly global economy and in the stock market will be those companies with dominant franchises, global reach and emerging markets presence. These domestic and foreign-based multinationals will most benefit from the massive wealth creation taking place in many regions outside the United States. A recent analysis we conducted of our current portfolio holdings showed that roughly 56 percent of revenues produced by our companies is derived from markets outside the U.S.

We see increasing evidence of the value that foreign buyers recognize in some of our country’s best companies, which, due to the decline in the U.S. dollar, are essentially “On Sale” to foreign buyers. With major U.S. multinationals trading at decade-low valuations and holding more cash in their coffers than at any point in the last three decades, we believe foreign buyers will continue to be attracted to U.S. blue chip stocks. We furthermore believe that we will see additional cross-border transactions on a global scale at the hands of foreign companies (such as InBev’s recent unsolicited offer to acquire Anheuser-Busch) as well as strategic financial buyers, such as foreign sovereign wealth funds.

We remain steadfast that now is a favorable time to buy some of the best businesses in the world at bargain prices. We encourage you, if possible, to add assets to your accounts and, where appropriate, to refer friends and family members to us, so they may also benefit from this rare occasion. And for most of you reading this letter – our clients – we ask you to re-read the sentiment from our founder at the top of this letter. To finish out our baseball analogy, it is never easy facing down a fast ball when you’re “behind in the count,” but you’ll only get a hit if you remain in the batter’s box.

Finally, we aren't in the business of making political predictions, but one policy change is almost certain to occur regardless of who wins this year's elections. The capital gains tax rate, presently at 15%, is bound to increase in coming years – and perhaps as soon as next year, even though the 15% rate is set to expire in 2010. In preparation for this likely increase, we are analyzing your accounts to identify concentrated holdings with large unrealized gains. This may indeed be the year to realize some or all of those gains, diversifying your holdings and avoiding higher future tax rates. In the coming months, we will contact you directly regarding strategies you and your tax advisor may want us to pursue to this end.
As always, we have included with this commentary your quarterly performance figures, management fee invoice(s), and a copy of your portfolio allocation as of 6/30/08. Please don’t hesitate to contact us with any questions – or even if you’d like to discuss this year’s baseball season.

Thank you for the honor of serving you.

With warm regards,

The Golub Group