Reality vs. Panic

Over the past few weeks, we have seen the market go from panic mode to relief mode back to panic mode. During this time, we have experienced both the worst point drop in history and highest point gain in history. We have not seen this level of distress from investors since the market crash of 1987. The current level of company stock prices is totally disconnected from their valuations.

For example, let’s look at Western Digital (“WDC”). WDC is down 62% from its 52-week high. WDC makes hard drives for computers. It you were to buy the company today, it would cost $3.5 billion. As of June 30th, WDC had $1.1 billion in cash on hand. In effect, you would be buying the company for $2.4 billion ($3.5 billion less $1.1 billion in cash). In the past year, WDC had operating income of $1.0 billion. If WDC generates the same level of income over the next year, an investor taking WDC private would generate an annual return on their investment of 42% ($1.0 billion in earnings divided by $2.4 billion)!!! There are other companies that have huge amounts of cash reserves as a percentage of their market capitalization: Apple – 26%, Motorola – 29%, Dell – 28%, Novell – 64%, to name a few. Instead of looking at stocks rationally, people are selling into the panic and hurting their long-term investment goals.

We know that it is emotionally hard for some of you to handle these market fluctuations. We also know that the worst time to sell is when the market is this low. In fact, this is one of the best times in our lifetime to put money to work in the market. If you have cash and don’t need it for 3-5 years, this is a great time to invest that cash.

At our client appreciation dinner, we mentioned that investors earn significantly less returns than the market over time because they get emotional and sell out at the wrong time. What follows is a link to an article that discusses this point while also sharing four truths about sound investing:http://moneyover55.about.com/od/howtoinvest/a/averageinvestor.htm?p=1. We hope you find it of interest.

DELAY IN THIRD QUARTER REPORTS: We will be getting the third quarter reports out to you as soon as possible. With the market fluctuations of the past few weeks, we have concentrated our efforts on reassuring those of you who are nervous and analyzing the rapid changes that have been occurring on a daily basis. With these fluctuations, opportunities arise and we want to be in a position to take advantage of these opportunities. We will be contacting you shortly about your portfolio. Of course, those of you who would like to meet with us sooner, please don’t hesitate to contact us.

Sincerely,

Jim, Mark and Greg.