Portfolio Update - 8/16/06

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .

Eight years ago today, my dear mother passed away. (Many of you knew my mom who we called Amazing Grayce which was certainly not a misnomer.) On that day, I began the incredibly difficult process of learning a life changing lesson, which is that I’m not in control of things and that my life wasn’t going to follow my script for it. So, what the heck does this have to do with your account and my management of it? It’s really quite simple. Investing in capital markets is the one business where you have no control. Mr. Market is in control and he doesn’t care about my opinion or anyone else’s. Even the greatest investors are impotent in controlling the market. In order to attain any success in the business of investing, you have to being willing to submit to Mr. Market.

The best you can hope for is to avoid losses when a market is going down and take advantage of gains when the market is heading up. Mr. Market doesn’t take orders from anyone. He makes the calls and it’s up to me to make the best of it for you. It’s a very humbling experience to know that you have to submit to Mr. Market. Part of the difficulty in reading Mr. Market is that at times he behaves rationally and at times he behaves irrationally. Currently, Mr. Market is acting very irrational (See Quant Funds Breakdown) . Given the current economic issues combined with the length of the current bull market, an irrational Mr. Market may whipsaw the market south quickly. Currently, the market is enjoying its second longest stretch without a 10% correction. We haven’t missed out much by not participating in the equity rally with the S&P overbought and only up 7.7% YTD and the NASDAQ down nearly 1%.

Furthermore, we are currently in the worst performing quarter of the market during the Presidential cycle. Historically, the stock market has only gone up half the time in mid-term election years and the third quarter of the year is by far the worst period historically for stocks. I’ll reiterate that I am not concerned about not participating in the current domestic stock market. I believe the risks far outweigh the potential rewards. While I’m confident that I can achieve my primary goal of protecting prior years gains through the upcoming bear market, it would be nice if I could come up with some investments that would provide you a measurable return, which I haven’t been able to do so far this year. Mr. Market has not been kind to me or your portfolios for the past 30 days. In fact, Mr. Market has been downright nasty. While stocks have been climbing the last few weeks, your account has been falling. On Tuesday (8/12), my model portfolio lost 2.7%. All of my YTD gains have been wiped out. Currently, your account is up ever so slightly YTD (0.5 – 1%). The downturn in your portfolio is primarily a direct result of the overly resilient US$ and the recent pullback in Silver and Gold. I’m bullish on the precious metals over the next couple of years and have been looking for an opportunity to buy in since the fall of ’05. When they pulled back in June, I added SLV and recently added GLD to your portfolio. SLV went up but fell substantially the last couple of weeks. While this activity is frustrating in the short term, I’m convinced that this will be profitable play over the next 12 months. I feel much safer in precious metals than I do in the stock market. In conclusion, we haven’t made much, but we haven’t lost anything either. If or when the bear market arrives, I’m confident that you’ll be insulated from any significant losses. Call me if you have any questions or concerns. All the best, Matt