March 31, 2011 Letter to Shareholders

March 31, 2011

Dear Shareholder:

I was about to start this letter with a not-so-funny remark about how our investors “are at least free of tsunami risks, and thank heavens for that!” Well, that statement lasted about five seconds and then fell victim to the delete button. I was wrong! One of the biggest geological faults in the United States is in west Kentucky. About once every ten years, scientists with long faces tell us the New Madrid Fault is about to pop. The last time it popped, it made one heck of a racket. On December 16, 1811, it shook on an intensity scale of 7.2 – 8.2, creating wave motion on dry land, but doing little damage because the area was lightly settled. About two months later, on February 7^th, 1812, a recurring tremor destroyed houses in St. Louis and Memphis and, in the process, created Reelfoot Lake in northwestern Tennessee. This last quake had an intensity of 7.4 - 8.6, and for a few hours the Mississippi River flowed backwards as the new lake filled.

The U.S. Federal Emergency Management Agency (of necessity a trained worst case worrier) has proposed several serious scenarios based on a Richter 9 event at New Madrid. In 1990 a “scientist” named Iben Browning predicted a seismic event down to the very hour, but it didn’t happen. I sold a brick store building in Fulton, KY, just prior to that, for way too little, because the Browning prediction was so widely believed. I shouldn’t have. ( Will Rogers said “Good judgment comes from experience, and a lot of that comes from bad judgment.”)

So you see, I’ve given you something new and exciting to worry about, not that you needed it. Maybe it will help you forget about states potentially defaulting on their state guaranteed municipal bonds, a worry on somewhat the same order of possibility as a New Madrid earthquake.

There are lots of other things to worry about that affect the price of municipal bonds and, indeed, the global economy: things like a possible terrorist attack on one of our major ports of trade or possibly a nuclear attack. Perhaps another financial meltdown? Derivatives, a dangerous creation of math majors, are not going away. They exist and may be used to the detriment of us all.

In the fifty five years I have been in the bond business, I have worried about these things to absolutely no avail. There is not much we can do about most of these things.

But one risk bond investors cannot ignore is the risk of price changes due to fluctuating interest rates. If you are going to invest in bonds, you have to be aware that the price of your bonds will go down as interest rates go up and up as interest rates go down, and interest rates go up and down almost every working day of the year. That means that the market value of any bonds or bond funds you own will be constantly fluctuating.

When you invest in a bond or bond fund, the goal of your investment is to buy a stream of income, the payment of which you want to be able to rely upon year after year. You should not expect to have either a growth or decline in the principal of your investment beyond that which stems from interest rate fluctuations. If you think you are going to make money buying and selling to catch these short term fluctuations in the value of your principaI, I can only say “good luck.” I’ve never known anybody who could get that right twice, and heaven help them if they are right the first time; they become inveterate gamblers. To potential investors in bonds I say, keep your eye on the income they generate and ignore the price. If you can’t do this, you need to liquidate your bond holdings and put the money in money market funds or certificates of deposit, expensive investments because they pay very little. But to some folks, the peace of mind is worth it.

If, however, you are able to relax while investing in bonds over the long term, you are in a position to make very good money. How? Albert Einstein is quoted as having said “Compound interest is the Eighth Wonder of the World.” It is true that if you will set a long term saving goal and compound earnings in the interim, compounding earnings can do what seems miraculous. As time passes it produces startling results. There are real rewards for the investor that stays a lifetime with what he begins. Furthermore, there are many good things that compound besides money. One, for example, is your economic worth as an employee or entrepreneur. And, of course property you own may increase in value over the years. I know lots of folks who have taken a look at their net worth at somewhere around fifty years of age who have been pleasantly surprised to see how this compounding has worked to their benefit.

We occasionally have folks who want to talk about investing in gold. They imagine the gold they buy will serve as a stable medium of exchange in the event the currency collapses. My question to this premise is “how are you going to buy a chicken with gold coin?” The chicken seller is not going to be able to make change in gold, and he is not going to be able to assure himself that your coin is indeed the weight and measure of pure gold that is represented. Finally, he is not going to be sure of the dollar value of gold at the moment of your transaction.

An old friend of mine who is in the construction materials business has a better suggestion. He said, “lets build a big concrete bunker underground, fill it with half pints of good Kentucky Bourbon and use that for trading when currency fails.” An intriguing thought! The only problem is how you keep from getting into your supply of “currency” when Saturday night comes?

Sincerely,

Thomas P. Dupree, President

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