A central part of our process has been to share the

management of a client portfolio with credible

mutual funds. We hold our clients’ mutual fund
managers to the same standard to which we hold
ourselves. In some “moderate allocation” funds we
have seen draw-downs in excess of 30 percent.
That’s not moderate.
Armistice Day, 2008
Fool me once shame on you: the Mutual Fund
A Return to Normalcy Industry exhibited herd behavior during the internet
bubble, overweighting portfolios in technology when
There isn't anything the matter with world valuations were highest.
civilization, except that humanity is viewing it
through a vision impaired in a cataclysmal Fool me twice... As the relative S&P 500 weight of
war. Poise has been disturbed, and nerves financial shares closed in on 30 percent last year,
have been racked, and fever has rendered many fund managers ignored those lessons, larding
men irrational; sometimes there have been portfolios with lenders geared to an over-levered
draughts upon the dangerous cup of consumer. Among those managers who shied from
barbarity, and men have wandered far from
Financial shares, many made like-sized bets on ever-
safe paths, but the human procession still
marches in the right direction. rising Commodity prices.

President Warren G. Harding, 14 May 1920 Mean reversion is too pernicious to ignore.
Investments which deliver above-market returns tend
Warren Harding left a modest Presidential Legacy, to attract a surfeit of capital, and returns abate. Too
but his campaign slogan, embodied in the above many cows in the pasture; the clover turns to mud.
speech, may be what we need. Let’s not flatter
ourselves, recent events in Finance are nothing
compared to the calamity of the Great War. Back to Basics
Importantly, with the estimated cost of nationalizing How do you make money in Stocks?
the banks and brokers approximate to that of the
Korean War (one-fourth of GDP), a quick fix from 1. You collect the dividend, the portion of the
Washington is improbable. The cupboard is bare. company’s earnings distributed to its owners.
2. The earnings of the company grow. With a given
Price to Earnings (P/E) ratio, your shares appreciate
There is reason for optimism. Last week’s election
proportionately.
reminds us that our political process, however galling, 3. Multiple Expansion. As a company’s bright
remains the world’s most effective means of prospects gain wider currency, other investors are
translating the people’s will to governance. Yes, we willing to pay more for a given level of earnings.
are still Number One.
How do you make money in Bonds?

The Markets and Your Portfolios 1. You clip the coupon every six months and collect
the principal at maturity.
2. Interest rates decline, making a high coupon more
It is only when the tide goes out, that you know valuable. The price of the bond is then bid up.
who was swimming naked. – Warren Buffett 3. Spreads narrow. Investor appetite builds for a
given issue or class of bonds, reducing the required
This Summer, we modified the “sector-agnostic” premium over the equivalent risk-free (treasury)
baseline we’d been investing with for over a decade, rate.
slashing financial exposure, taking profits in the
energy complex, and avoiding industries that relied How to lose money?
on a liquid consumer or a willing lender.
1. Cut dividends.
2. Lower earnings
Overweighting in Health Care and Technology was 3. Shrink P/E ratios.
justified on the fundamentals of the industries, as well 4. Bond issuers default
as the historically defensive nature of these sectors. 5. Interest rates rise
6. Spreads widen for lower-grade bonds.
While these steps proved prescient, they did not
prove sufficient. All industries sold off sharply, and The past 18 months have seen all but rising rates.
diversification failed to protect. Gold broke down, Should deflationary pressures build, real rates (net of
and perversely, the Dollar staged its strongest rally in CPI) may creep up, adding this to the mix. Let’s
years. tread lightly!
Copyright 2008, Farragut Resources, LLC. The material presented is for informational purposes only and is not intended to recommend a specific investment strategy or the
purchase of securities. All opinions are those of the author, and do not reflect the policies of Farragut Resources or Capitol Securities Management, Inc. Investment advisory
services and brokerage provided through Capitol Securities Management, Inc, Member FINRA/SIPC.
 While the impact on outstanding contracts should be
Where Now? modest, this recognition that the guarantees were
sold too cheaply reinforces our assertion that
We like Bonds, Growth Stocks, and Emerging Markets,
investors would do well to consider these benefits
with an anchor in Natural Resources. Pretty much
before they are no longer available.
what we’ve been doing for the past decade, with
the exception of not many Real Estate or Finance
Companies. We continue to sift through the rubble,
College Funding
but as yet have few high confidence candidates.
Virginia Prepaid Education Program enrollment opens
US Growth Stocks continue to have appeal. The idea
December 1, 2008. An on-line application will be
of owning shares of well-capitalized firms, with growth
available after that date. Those who’ve taken
prospects better than the economy as a whole, holds
advantage of this scheme over the years are
more water than picking through what Buffett calls
pleased. General information on the Virginia
the “cigar butt” denizens of many value screens.
Prepaid Education Program is available online now
That said, when shares of the world’s premier
at www.virginia529.com/
Aluminum concern trade for less than a 12 pack of
Bud, we admit some affection for the cyclical stocks.

Emerging Markets are Growth Stocks. While an Retirement Readiness (2)

economic slowdown will impact all economies, the
younger, more dynamic corners of our world may In our Fiduciary Consulting practice, we advise clients
ultimately grow the fastest. and their employees on the risks and responsibilities
associated with Employee Retirement Plans.
We must be mindful of the differences within. Just 10
years since its most recent default, with Stalinism in full We are now seeing a new hazard in retirement plans.
bloom, there is an ethical and financial hazard of Unless a firm’s employees are prepared for retirement,
investing in Russia. Conversely, Brazil looks great the value of the business can be compromised.
when the tide goes out. Financially insecure employees must continue
working well past their desired retirement age. The
Why do we like bonds? It’s not just the income, it’s impact on productivity, payroll and benefit costs can
the opportunity for capital gains. High-grade materially impact the resale value of a business.
corporate bonds are paying a greater premium to
their government equivalent than at any time since With this equity often their primary retirement savings,
1932, and are priced to reflect a 50 pct default risk. owners are finding they have a meaningful direct
Municipal Bonds yield far more than treasuries, with financial interest in ensuring their staff is retirement
the income tax-free. ready. We help with our “Plan Health Reports,”
which develop census data into specific steps to
These disparities are not likely to persist. As the address the participation and welfare of participants.
spread between these bonds and the risk-free
equivalent (treasuries) narrows, they may well
appreciate in price.
You make most of your money in a bear market,
This potential compares favorably on a risk-reward you just don’t realize it at the time”
- Shelby Cullom Davis (1909-1994)
basis to the negative real returns cash and T-bills
promise over the coming year.
The past 18 months have been taxing for us all. The
most important action we can all take is to count our
Longer-term, inflation presents a very real threat to
blessings.
fixed-income investors. The U.S. Government has
never before taken such an ownership stake in Many friends and clients have found useful a
private industry. Recall Gresham’s Law: Bad money thorough, objective review of their outside investment
drives out good. accounts. In viewing the whole, we often uncover
compelling opportunities to improve one’s situation.
Let us do the same for you.
Retirement Readiness (1)
Frank J. Ruffing CFP
The three-legged stool of retirement planning, McLean, Virginia, November 11, 2008
frank@farragut.us.com
Pensions, Savings, and Social Security, is facing
pressure on a new front. According to Bloomberg,
the generous income and principal guarantees
afforded by Variable Annuities have jeopardized the
capital base of the Insurance Companies who’ve 7918 Jones Branch Drive, Suite 800 McLean, VA 22102
sold them. Telephone 703-283-5220 www.farragut.us.com
Copyright 2008, Farragut Resources, LLC. The material presented is for informational purposes only and is not intended to recommend a specific investment strategy or the
purchase of securities. All opinions are those of the author, and do not reflect the policies of Farragut Resources or Capitol Securities Management, Inc. Investment advisory
services and brokerage provided through Capitol Securities Management, Inc, Member FINRA/SIPC.