COMMENTARY - 3Rd QUARTER 2008

These have been extraordinary times in the financial markets. The current uncertainty has raised many questions regarding the soundness of our financial system, integrity of our financial institutions and future direction of the economy and stock market. In our continuing effort to be as proactive and communicative as possible, we’d like to use this commentary to answer many of the most frequently asked questions that we have received from our clients over the past several weeks.

In light of the market’s decline, has your investment strategy changed?

Our investment strategy has not changed due to the current market sell-off.  We will continue to be disciplined in holding a diversified portfolio of large, multinational, dividend-paying businesses, currently trading at very attractive valuations.  This strategy has proven itself to be the most dependable way to protect and build wealth over time.  

How are my Schwab money market funds, bank deposits and CDs protected?

Charles Schwab has said that it is committed to maintaining the dollar value of its money market funds and is financially strong. Schwab stands to benefit significantly from the recent turmoil on Wall Street as evidenced by its 26% growth in income over the first six months of the year and the $85 billion in net new client assets received as of the end of August. Additionally, the Federal government clearly understands the importance of maintaining the value of these funds and is crafting a solution to protect these assets in much the same way the FDIC insures bank deposits. Regarding bank deposits and CDs, the FDIC insures up to $100,000 per institution, per beneficiary.  The current bill before Congress is seeking to raise this coverage to $250,000. For further information, please refer to the FDIC’s website at www.fdic.gov.

What is your opinion about the government “Bailout” plan?

We prefer to term the “Bailout” as a relief plan that will help to free up credit markets and allow for our financial markets to operate freely and effectively as they have throughout our history. As of this writing, Congress is hammering out a workable version of this plan. We are confident that a bill will pass. The long-term impact will be positive for our economy and markets.

Why do we hold on to individual stocks when they have fallen so much?

The fact that a stock has fallen significantly in price is not a reason in itself to sell it. We are continually evaluating the fundamentals of the businesses we hold. We find it illogical that stocks are the only assets which become less appealing the cheaper they are priced. We believe the opposite should be true.  We will sell a stock if our original reasons for owning it are no longer applicable or if the stock has become dangerously overvalued.

Why has there recently been more trading than usual in my portfolio?

The increased amount of trading has been the result of our efforts to minimize the risk in your portfolios and to upgrade the quality of your holdings. We were wrong in a couple of cases in terms of our analysis and we sold these stocks in order to minimize further losses.  Capital was reallocated to more attractive opportunities.  We have also made sales of appreciated stocks in order to lock in profits.

How did we get to the present financial crisis?

The short answer is greed, too much leverage, conflicts of interest and outdated and inadequate regulation.  These forces led to a speculative real estate bubble whose implosion has impacted the balance sheets of American homeowners and the financial institutions that extended credit to them. The unwinding of this bubble has for the moment shaken the confidence in our financial system and caused the flow of capital in our economy to be impeded.  It is clear at this point that our government officials were naïve and lazy, and that our rating agencies and financial institutions were corrupted. This phenomenon is nothing new in our history. We have gone through similar periods of misuse of power motivated by greed. The result has always been the same, a bust which then brings about positive change. We are now experiencing the inevitable “bust” from the misdeeds of many of our top corporate and regulatory figures. We will work our way through this sooner than most people currently believe.

Are we optimistic or pessimistic about the future?

We are optimistic.  Our experience has taught us that when most people are deeply pessimistic about investing, the greatest opportunities present themselves.  We are particularly optimistic about global, blue-chip, dividend-paying stocks because at this point in the cycle they offer attractive valuations and relatively high yields compared to alternative investments.  Despite the headlines, we live in an age of worldwide growth.  China, India, Brazil, and the rest of the emerging world will continue to grow.  The massive movement of people worldwide from rural to urban areas, free to improve their living standards, connected by the internet enabling them to leapfrog technologies to create enormous new wealth, has never occurred before in the history of the world.  It is the great, multinational blue-chip corporations which will reap the benefits of this wealth.  Some estimates place current cash sitting on the sidelines at $5 trillion.  As confidence returns, much of this money will be invested in the businesses we own in your portfolios. One thing we are sure of: this money will not flow into alternative investments such as real estate, hedge funds, and private equity because they have performed so poorly and in fact, may be seen as the partial source of the current problems.

While these have been the most frequently asked questions, they may not be yours, so please call if you would like to have a conversation about your specific situation.

Lastly, we are pleased to announce that Richard Trautwein, CFA has joined the firm as a Senior Investment Advisor and will be operating out of our Pasadena office. Dick brings nearly 40 years of investment experience to the Golub Group. Previously, Dick was a senior partner at the investment counsel firm of Van Deventer & Hoch and a Senior Portfolio Manager at BNY Mellon. We are excited to have him on the team.

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 9/30/08. 

Thank you for the opportunity to serve you.

With warm regards,

The Golub Group

Disclaimer: All opinions presented in this commentary are strictly those of the Golub Group.  You should not construe any implied or expressed conclusions presented as a promise of future returns.