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Dear Shareholder:
Telling the Truth when Nobody Asks: Telling the truth when it is inconvenient, especially when nobody is asking, is something lots of folks would just as soon finesse. Hearing the truth is not always convenient either. I had an experience that drove this point home when I was a young officer in the Navy.
Our Destroyer was stationed in Narragansett Bay, Rhode Island where, in those days, they tied the “Tin Cans” to buoys when they were in port, a complex process that involved putting out a boat with someone to bolt the Destroyer’s anchor chain to the buoy ring. This was especially hard to do in windy weather as the high bow of a Destroyer acted like a sail, making it difficult to maneuver and hold the ship over the buoy long enough to get the chain attached.
We had this problem one stormy afternoon when we returned from the day’s exercises. But this wasn’t the only problem the Captain had on that day. He also had to deal with the fact that a senior officer who had been his navigator had been transferred without a replacement, and so he had to depend on a very junior officer to navigate; Ensign Dupree. I was as green as they get; the only recommendation I had was good college grades in navigation and a couple of months hanging around the bridge of the ship helping the “real” navigator.
On this particular day we were assigned a buoy that had a submerged rock or “knuckle head” located about 150 yards south of the buoy. Since the wind was out of the north the Captain had to pass within a hundred feet of this obstruction. I had done my homework and felt I could almost see the rock’s exact location, so I stood on the bridge, nervously staring in that direction.
As we approached the buoy the Captain became engrossed in backing and twisting to put his bow directly over the buoy. In the process our stern began to drift closer and closer to the place where I knew the rock was located, but I was too intimidated to do more than occasionally mumble “Captain, be careful” in his general direction. Finally, in one last surge of power, we moved into position and made the attachment. Only fifty feet behind us mud welled up where our propellers had washed it from the top of that rock.
When all was secure the Captain called me into his office, stood me at attention, and gave me an Irish lecture that can’t be repeated here in its entirety. Suffice to say, after some heated excoriations, he told me that my career and his had very nearly come to an end that afternoon and that I had failed in my responsibility to “take him by the throat and shake him” if that was necessary to get his attention.
This serves as a segue to warn you about one possibility in the future of bonds. Many economists are insisting that the Federal Reserve is overdue to raise short-term interest rates, and when they do, bonds may drop in price. This was their opinion well over a year ago so their timing is not impressive. Nevertheless, now is the time you should decide how you are going to react if bond prices actually do drop. If you are going to want to sell your shares once you see a price decline, this is the time to sell, not later. “Later” is when you should be buying. (All that is needed to succeed with this strategy is the right guess about what the Fed will do, and when.)
On the other hand, if you are invested for the long term, you don’t much care what the Fed will be doing in the next few months, because you are going to be depending on the stability of your dividend for income. In the past ten years (thru Jan 31st) our Kentucky Income Series had a total return of 5.09%. The price per share was $7.80 on Jan. 31, 1994 and it was $7.68 on Jan. 31, 2004, down 12 cents. The 5.09% return was all tax-free, the taxable equivalent of about 8.75% in the highest federal tax bracket; a good average return even for stocks. During those ten years the price averaged about $7.44 per share, and was down sharply twice (1994 and 2000) to about $7.00 per share but recovered both times in a matter of a few months. A short term investor would have gone crazy trading in and out during these ten years; but a long term investor was happy with his/her steady dividend. The next ten years could be similar, so be forewarned.
Naturally I would hope you would be a long term investor. Then I could point out lots of positive things about our funds that I would hope you would notice. Such things as no sales or redemption charges, not ever; and fully qualified brokers to help you with all your investment questions on any subject. Also, a real person answers the telephone! Think of that, the next time you get a phone menu.
My wanting you to notice us reminds me of a Joe Creason story about a six year old girl who got a bright new wrist watch for Christmas; her first. As the day wore on, and nobody commented on her new watch, she was unable to stand it any longer. “Oh my”, she exclaimed, “it’s so hot in my new wrist watch.”
I know how she felt. Sometimes we feel the same way.
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