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Dear Shareholder:
Popcorn and Country Ham: Having picked up ten unwanted pounds over Thanksgiving and Christmas, I am now on a diet that includes popcorn as an appetite inhibitor. (We will pause here while the real dieters guffaw.) My contemplation of popcorn, while trying to ignore fading memories of country ham, has inspired some rambling but deeply philosophical thoughts.
Popcorn, if you get it while it's hot, has the unique quality of tasting wonderful and seems to satisfy hunger. Actually, it has little food value, providing no protein, and if you avoid slathering it with butter, it has almost no caloric value as well. Composed of a lot of air and little substance, it gives the illusion of filling you up, but rapidly reverts to nothing. It has the curious quality of expanding from a few kernels in the bottom of a pan to a huge bowl of product occupying, say, fifty to a hundred times the space it occupied before heat was applied.
Country ham, on the other hand, is quite different in many respects. The original ham actually shrinks during the curing process. It is slow work to create a country ham, taking lots of patience and a highly developed skill. Kentucky country hams are often cured with a heavily applied mixture of salt, sugar and pepper. Sometimes smoke flavoring is added, but not as often in Kentucky as, say, Virginia. Good country ham is always aged carefully for about a year. Some folks think the finest ham is that which is aged for two years. A lot of discipline and sacrifice (starting with the hog) goes into making a good country ham. Its food value, its protein and especially its caloric values are high.
It strikes me that over the past ten years the financial markets have taken on many of the qualities of popcorn. As financial market information has become readily available through television networks such as CNBC and CNN Financial, an incredibly false sense of confidence in stocks has developed in a wide segment of the population, both at home and abroad. "Everybody can trade for themselves. Everybody is an expert. Everybody is fully informed. The enormous price run-up of the late 1990's will surely happen again, just wait! It's a new world, new economy. The Dow is going to hit 12,500 before 2002 ends, etc.
Listen to one of the financial channels carefully and you will hear all of these things said every day. To be fair, an occasional contrary opinion is aired, but these seem to come over as if they were in parenthesis. "The Opening Bell" on CNBC is reported like a horse race, full of excitement and anticipation.
This enthusiasm is not found just in amateurs. It abounds among professionals as well. Last week there was a report that of the 16 professional analysts that followed Enron, 13 rated Enron a "strong buy" and 3 a "buy" only two weeks before its collapse.
And where has all this enthusiasm gotten us to today? Well, as this is written the Price/Earnings ratio on past 12 month earnings for the S&P 500 is 55.1x. Back at the beginning of the big decline in stocks, this ratio was around 30x. The fundamentals are frightening. It looks like a popcorn market to me.
Where's the Country Ham? The country ham in today's market would certainly include high quality bonds, especially high quality municipal bonds for 28% tax-payers and above. Investors in the top income tax brackets can buy a very stable income that approaches, as a percentage, most 20 year averages for the Dow Jones Index. And our Income funds can be bought for almost exactly the same price per share as a year ago. So, in the current market "country ham", unlike "popcorn", can still be bought at a reasonable price.
Meanwhile, we continue to try to apply country ham care in the management of our funds. As of December 31st all six of our rated municipal bond funds were rated five stars by Morningstar. This week's BusinessWeek is carrying our three Short-to-Medium series on their "Bond-Fund A-List". Two of these three were rated "Best of Class" in a category with only three other funds.
Experts? The Enron analysts remind me of a story my father told. Dad traveled west Kentucky in the early 1930's. In one town there was a certain farmer who held himself forth as the world's top expert on the best Kentucky bourbon. The gentlemen ran a little whiskey of his own when the corn was in, but he maintained nothing was as good as a certain brand, one which few of his neighbors could afford. He was arrogant about his highly tuned palate.
Dad bought a small barrel which had been charred inside. He then had someone procure a gallon of this fellow's moonshine, placed the barrel in the trunk of his car and let it slosh around back there in the heat for about a month. Once properly "aged", Dad decanted a fifth into an empty bottle of the highly favored brand. He then had the local druggist invite the fellow in for "a taste of something really good". The expert came, sipped and waxed euphoric, detailing the fine points of taste and color he detected. I asked Dad if he ever told the man the truth. He replied that there were some things too good to ruin by telling.
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