Excerpt from 2009 Fourth Quarter Letter to Clients

So where are we now? We are in one of the most exploitable stages of the emotional cycle of investing. We think some people are still despondent, most people are depressed, and some people are starting to feel hopeful. We characterize despondency as a state of mind in which one has an aversion to mental activity, specifically an aversion to thinking about investments. When despondent people start thinking again they become depressed. We characterize depression as a state in which people do not want to own stocks but they do not want to sit on cash; the end is not in sight; change is desired but nothing is trusted; so many questions remain unanswered the problem cannot be solved; turning to experts yields even more confusion because their opinions vary wildly. Asset values have recovered significantly from March 2009 which is requisite for people to move from depression to feeling hopeful. We think the start of feeling hopeful is marked by contemplation of questions about the recovery in stocks being for real or the evidence of stabilization being enduring.


This is one of the most exploitable conditions because we believe:
• Tremendous amounts of information have been garnered since Lehman Brothers went under sixteen months ago (the financial crisis ended, the economy recovered, business has generally stabilized, employment has stabilized, residential values have stabilized, housing has stabilized, energy prices have stabilized, even the commercial real estate crisis seems to have passed the midpoint).
• Yet today with the S&P 500 at 1133, it is 5% below where it closed on the day Lehman Brothers declared it would file for Chapter 11 bankruptcy, credit markets froze, and stocks tumbled.
• Ten trillion dollars is available to flow into equities
• Most people are despondent/depressed


Over the past ten years Wal-Mart’s earnings doubled and dividends quadrupled as the company expanded internationally with masterful success. The stock has basically been flat for ten years with the primary difference being that ten years ago Wal-Mart traded with a PE above fifty and today it trades with an estimated PE of thirteen. It has been a situation where one could sleep well with the company and sleep on the long flat stock chart. Do not be surprised if stocks of the Wal-Mart ilk comprise a portion of purchases in the coming months. Such a thesis may also be timely as it would seem a likely recipient of investment dollars from the newly hopeful.