Your investment house in peace and war

Dear Client:

No doubt you’ve noticed that the markets got off to a dramatic start this year. Since the U.S. economy looks to be in pretty good shape, with no recession looming, you have a right to wonder why stocks went into free-fall last week, and what has become of the life’s savings you thought you had invested with us. That’s why we are here at Merrill Goldman Deutsche Morgan (a division of United Bank of Switzerland) — to answer your questions!

The short answer is that the markets are currently experiencing what we in the investment industry call a “perfect storm” of unforeseeable disasters. First the Chinese economy slowed down unexpectedly, so China’s demand for oil declined, which consequently hammered down the global price of oil and other commodities, thereby devastating energy stocks. Meanwhile, the U.S. Labor Department reported that 2.7 million new jobs had been created last year at higher wage levels than ever before — which should be good news but turned out to be bad news because the Federal Reserve Board mistakenly assumed it was good news and so announced plans to raise interest rates, which fanned more fears of another recession, further driving down stock prices.

All of these crises occurred at the very moment that our office coffee machine broke down. And did I mention that last Friday my wife left me for a guitarist in a rock band?

To summarize the “perfect storm” hypothesis: Your portfolio grew exponentially during the stock market boom of recent years due to our prudent management and brilliant fundamental research. It’s shrinking right now due to forces beyond anyone’s control.

Very-long-term strategy

To navigate our ship through these volatile waters, we have implemented several short-term adjustments to our investing strategy. With the help of our corporate yoga instructor, we have adopted a defensive crouch toward the equity markets. The watercolor portraits of Alexander the Great and Joan of Arc that formerly hung in our hallways have been replaced by portraits of Neville Chamberlain, Gracie Allen, and George Costanza. We have padded our office walls with reinforced rubber so nobody suffers concussions when we bang our heads against them. Also, at the suggestion of our corporate therapist, we’re crying a lot.

Notwithstanding current market dynamics, we have made these adjustments with an unwavering commitment to the virtue of investing for the long-term. As has been proven in the past, a well-diversified portfolio of high-quality, long-term investments will withstand short-term market volatility and turmoil. Remember: If in 1805 you had invested $100 in the Standard & Poor’s 500 stock index, and if you had held onto those stocks ever since and reinvested all the dividends, today your original $100 would be worth more than the gross national product of Japan. And if you continued to pursue this strategy for another century, you could buy the entire world. Of course, you would be dead. And there was no S&P 500 index in 1805. But you know what we mean. Don’t you?

Stock selection has sometimes been dismissed as a beauty contest in which judges must pick the prettiest faces. Actually, our job is far more complicated: We must pick the faces that most people think that other people think are the prettiest. It’s a daunting challenge, believe me. But that’s why you pay us the big bucks!

Pledge of service

From our long experience here at MGDM, we know this much: Every cloud has its silver lining. The current drop in stock prices will offer real bargains that we can snap up when the market hits bottom, if only we can figure out when that will be. For another thing, a major socioeconomic concern — the shrinking of America’s vital middle class — has largely been reversed in the past month, thanks in large part to our own upper-class clients, many of whom have joined the ranks of the middle class since the market slide began.

The challenge to any investment strategy is short-term uncertainty. We are living through one of those uncomfortable periods, and we recognize it may be unsettling. We appreciate the trust you have placed in us as we navigate these volatile waters. Wait — I’ve already used that metaphor. Make that “stormy skies.”

We are always available to answer your questions, except for our chief investment officer, Rodney Throckmorton, who jumped out of his office window last week. Fortunately, our low-rise suburban campus is only two stories high, so Rodney suffered nothing more than a sprained ankle. We expect him back next week with renewed energy and fresh perspective, if he doesn’t get hooked on painkillers.

Please feel free to contact a member of our team at any hour of day or night to discuss your investments or the market in general. That’s why we are here — to give you a level of personal service that no other investment house can offer. It’s the least we can do, especially since you’re our only remaining client.

Sincerely,

G. Holmes Cadwalader
Chairman and CEO