2009 1st Quarter Letter {Part IV}

Equities Longer Term:

The S&P 500 currently trades near price lows of 2002-2003. These were also its stock prices in May 1997. Most anything held during the past ten years has lost money. Shareholders of once sacrosanct companies like Ford, Microsoft & General Electric are down better than 70% from their 2000 highs. So a fair question to address is whether investors should remain involved in the markets. My answer is “Yes….But”.

The “Yes” part comes from stocks’ longer term attractiveness due to the likelihood that the next 10 year returns will be better than recent history. The “But” is that the market is a different animal today than it was 20 years ago. Some of the factors that influence it have not changed. Valuation for instance still matters and industries with weak fundamentals will ultimately not support their stock prices. But stocks today, especially in the short term, are subject to much different metrics. Part of this is a change in technology and laws that mandate that all investors simultaneously receive the same information. Part of it is that markets are more illiquid today than in the past.

Longer term equity prices have averaged growth during different periods of 7-10% per annum. Also the only two previous instances where stocks similarly declined as in 2008 saw returns over the ensuing 12-18 months in excess of 50%. Since we think stocks are currently undervalued we believe that now is not the time to withdraw from the market.

Investors need exposure to equities but not necessarily to individual stocks. Changing markets call for changing investment strategies-“Variant investing for a variant world”. One of those is our use of ETFs. The other is the investment plan and the other is to adopt a more aggressive and opportunistic approach if we do stay in a trending market for a majority part of 2009.

We will detail more of this in subsequent writings to you and hopefully in person soon. Once again thank your for your continued support. Please remember to check us out on the web! We can put out so much more content there than in a normal newsletter. Most of it can be read in a few minutes time. It is also the easiest way to give you an insight into our current thoughts. You can find us at: http://lumencapital.blogspot.com/

*Long General Electric & Microsoft in certain legacy accounts at the time of this writing.