It's About Time January 31, 2004

Ecclesiastes 3:1-10

1 There is an appointed time for everything. And there is a time for every event under heaven-- 2 A time to give birth
and a time to die; A time to plant and a time to uproot what is planted. 3 A time to kill and a time to heal; A time to tear down
and a time to build up. 4 A time to weep and a time to laugh; A time to mourn and a time to dance. 5 A time to throw stones
and a time to gather stones; A time to embrace and a time to shun embracing. 6 A time to search and a time to give up as
lost; A time to keep and a time to throw away. 7 A time to tear apart and a time to sew together; A time to be silent and a time
to speak. 8 A time to love and a time to hate; A time for war and a time for peace. 9 What profit is there to the worker from
that in which he toils? 10 I have seen the task which God has given the sons of men with which to occupy themselves.

The purpose at hand is capital preservation.

The popular models for understanding the investment world are out of date. Current culture demands that the most complex
situations be reduced to sound bites of a few seconds, and answers are obvious or they are not answers. It’s easier to shoot
the messenger rather than evaluate the message. This behavior is not conducive to great investment results, and will likely
wreak havoc on the majority of investors.

The situation is worsened by the lack of integrity of our marketplace. Truth has become irrelevant and values are all relative.
The anchor bias of the marketplace begins with the aphorism “the more things change, the more things stay the same”. It’s a
bias rooted in the natural human error of oversimplification and an innate desire to shun issues of magnitude that defy
quantification. While investment markets have always been full of change, clinging to the notion that everything is still the
same is naïve and dangerous. The correlation of decision processes within the world’s largest investors (U.S. Pension Funds)
has now reached a level where the market impact can be devastating. Their concurrent grasp for income or growth, for liquidity
or private equity, has become a source of return similar to the baby boomers’ impact on homes and cars in the 50’s, growth
stocks in the 60’s, hard assets in the 70’s, junk bonds in the 80’s, and tech stocks in the 90’s. Correlated behavior not
based on rational economics is essentially momentum investing and drives roller coaster returns.

Long-term investors risk extinction if they don’t apply more attention to the ramifications of their decisions. Relative value
investing could be described as decision by indecision. The majority of investors accepts market valuation as a democratic
process (the infamous Buffet voting machine) and therefore must be a true indicator of value. A close analysis of the ballot and
ballot box indicates that market values are driven by popularity contests not logical economics. Popularity is less driven by
consistent sequential earnings growth and more by brand recognition or significant earnings surprises. The overwhelming desire
to be “popular” is now systematically driving decisions to a shorter and shorter investment horizon. “Systematically” includes
the preponderance of CEO compensation based on stock performance with no income statement consequences. It includes Wall
Street’s market cap based allocation of resources so the larger a stock’s market cap becomes the more investment worthy it is,
therefore more analysts can follow it and recommend it, and more salesmen can sell it, and more advisors can buy it, and this
makes it more “attractive”. This artificial feeding of liquidity desires has created a false sense of security and debased
the integrity of our markets.

Another systematic driver is the abundant reliance on mathematic modeling strategies that only partially reflect
reality. Program trading is one such manifestation of these models and such programs now provide over 40% of the trading
volume in the market. As models beget more models and robots essentially take over the execution of transactions integral to
our economic lives we enter a spectrum of risk that is not quantifiable. It is the difference between unlimited downside and
unlimited upside. Too big to fail? Tell that to the passengers in the Titanic.

Investment consultants near and far will advise their clients over the next few months and quarters that they have studied the
markets, the sector returns, the investment funds available, and have decided that the optimal portfolio is X. X is perfect
because it offers the best risk adjusted return of all the portfolio samples in the database. Many rules have been established to
guide this recommendation such as length of track record, requirements for full investment, adherence to style and market
capitalization guidelines, consistent management resources, position size and liquidity, etc. The notion that perhaps that
whole particular universe is the wrong the place to be cannot be discussed because of other rules, i.e. no market
timing, maintain appropriate (i.e. maximum) diversification, avoid tax erosion, etc.

Careful observers of history recognize that markets based on unfair trading, corrupt middlemen, or irrational pricing
ultimately implode with far reaching consequences. This may have the greatest impact on the latest darling of Wall Street
– Hedge funds and Families of Hedge Funds.

The tremendous demand for short-term performance has brought intense focus to the hedge fund industry. This marketplace of
investment return is a result more of balancing acts and intellectual gymnastics, and while often of Olympic quality is still
dependent on the quality of the arena. The arena we now know has a leaky roof, inadequate judges, and so many me-too
competitors that long term results are unreliable for issues of survivor bias (50% of hedge funds started five years ago are not
in business today). If and when this becomes recognized as an overcrowded, overpriced marketplace, the stampede
for the exit may well destroy the whole herd.

We are creatures of habit. We resist change in our homeostasis. This natural tilt affects our ability to evaluate risk and return,
and causes us to look where the light is, instead of where it is not. As the search lights of the SEC and Elliot Spitzer have
shown, Wall Street has dropped guidelines of protecting the investor in favor of protecting their lucrative
middleman turf bringing to sharp focus the real risks to an individual’s capital.

It’s about time. Keynes said it best, “in the long run, we are all dead”. We must manage our lives and investments for a
reasonable investment horizon. We don’t drive cars focused on the hood ornament and we shouldn’t manage our capital
focused on the next quarter’s results. The current obsession with short-term results may reflect an overwrought concern for
control. The concern was bred from exercising no control in the last tech bubble, and so market participants may have jumped
from the frying pan into the fire.

As for me, I believe we must return to investments where capital is preserved through growth that is organic or overwhelmingly
obvious. This can be accomplished in various ways, notably in timber, real estate, and wireless communications among others.
Appropriate investment choices will generate cash flow, protection from inflation, and value within a deflation. As
U.S. based investors we are entering a period of significant uncertainty where investment errors are magnified, and investment
successes much more difficult to predict.

Wilshire REIT Index Plum Creek – Timber Proxy

American Tower – Wireless Comm Proxy Organic Investment Results

Havoc Wreaked

So what? The Titanic sank. Thousands of people killed for simple pilot error – no wonder Captains go down with the ship.
Some Hedge fund managers would say that is an easier fate than what they face now in terms of high water marks.

The stampede for the market’s exit has nearly killed the herd. The quantifiable logic that market forces are outside quantifiable
boundaries is now plain to see, and no one seems to know what to do. The lead steers are all dead or penned for slaughter.
The system that created unimaginable wealth is somehow unimaginably gone. Or is it? The basics of life are still produced and
available at the supermarket. The electronic means of moving value p.k.a. Cash, is still in tact. As long as you don’t have to
use a wheel barrow to carry your bank notes, no one can tell the currency is debased. The issue at hand is reconciling the
American dream with American reality. She’s gone and I don’t know where. The havoc wreaked stems from misguided loyalty
to pure capitalism, NOT capitalism with moral restraint.

Bill collection is managed by robots who only connect you to a human being when absolutely necessary.

Leaders like Buffet now comment that the last 30 years are an anomaly of history, and making double digit returns will never
be seen again. How quaint.