The U.S. stock market couldn’t gain any traction in the first half of the year. And Hawaii investment experts didn’t fare any better.

Amid fears of a spreading European debt crisis, continued housing problems on the home front, and reverberations from the BP oil spill, the major indexes all hit the midyear point lower than they started in 2010.

Local stock pickers similarly struggled, with only one of four contest participants squeezing out a gain in the newly renamed Star-Advertiser’s ninth annual survey of best investment ideas.

The outlook for the remaining six months of 2010 doesn’t look much brighter, according to local stock expert Norm Caris, whose hypothetical $20,000 portfolio was up a scant 1.1 percent through the first six months.

“Stock prices show we have dodged another Depression, but toxic anti-business rhetoric and policy errors are still hurting the still-fragile recovery,” said Caris, a Kauai resident and managing director for institutional sales for Caris and Co.

He said the current tax and spending policies of federal lawmakers are counterproductive for business, investors, and market confidence.

“The market will continue to fluctuate based on legislation and how the politics turn out in November,” said Caris, whose portfolio hit the midyear point worth $20,214.20.

Still, he said stock prices have retreated to more sensitive levels and investors should be looking to increase their exposure.

In the first six months, the Dow Jones industrial average posted a 5 percent loss, which includes reinvested dividends, while the NASDAQ composite index declined 6.6 percent and the Standard & Poor’s 500 index fell 6.7 percent.

Barry Hyman, vice president-managing team for the Maui branch of FIM Group Ltd., was the only other stock expert besides Caris to trump the indexes. Hyman’s portfolio lost 3.2 percent to $19,357.81.

Rounding out the contingent of experts were Richard Dole, chief executive officer of Honolulu investment adviser Dole Capital LLC, who lost 8.2 percent to $18,362.90; and Dwight Melton, co-founder of the Hawaii Stocks and Option Group, down 18.2 percent to $16,362.93.

Caris revamped much of his portfolio for the third quarter, including closing out his short position in Honolulu-based Alexander & Baldwin following a 7 percent gain through six months.

The short position enabled Caris to profit as the stock price dropped.

He also doubled down on his positions in both Hawaiian Holdings, parent of Hawaiian Airlines, and Intel, as well as added new companies in Collective Brands, which owns Payless ShoeSource stores, and semiconductor equipment maker Novellus.

Hyman, hurt in the second quarter by a 43.5 percent decline in investment management firm U.S. Global Investors, more than doubled his position in that company for the third quarter because he sees it as a bargain.

“They specialize in natural resources, like gold, as well as emerging markets, which hold much of the world’s natural resources,” Hyman said. “At its current extremely depressed price, U.S. Global is even more undervalued relative to the price of gold and natural resources.”

Hyman sold all his holdings in Barrick Gold after the stock posted a 19 percent return in the quarter, but said gold mining stocks remain undervalued relative to the price of gold.

“Investors afraid of the stock market are buying gold bullion, coins or exchange-traded funds, but the pricing of mining stocks have not kept pace,” he said.

He added two stocks to his portfolio in the quarter. One was global telecom provider Vodaphone, which pays an approximate 7.5 percent dividend and has a consistent cash flow.

His other pick was Gaiam, a producer and marketer of lifestyle media and fitness accessories.

“While I am very cautious of many retail companies in the current environment, Gaiam is a well-managed niche company that I expect will do well despite the strapped consumer,” Hyman said.

“Through subsidiaries like Real Goods, and relations with other outlets, they focus on the consumer movement to be more energy efficient, environmentally conscious and life-quality oriented.”

Dole, who didn’t make any changes in his portfolio, said he hasn’t changed his market outlook since the beginning of the year.

At the end of the first quarter, he said the market had gotten ahead of itself based on a slow-growth environment and likely would be vulnerable to bad news.

“We certainly had a market correction, partly due to slower expected China growth and an unexpected oil spill driving down energy stocks,” Dole said.

“I continue to believe that the market will be higher by the end of the year, but we will have corrections along the way. Price-sensitive stocks suffered more than the market as a whole in the recent market downturn.”

Dole’s best performer in the quarter was Territorial Bancorp, the holding company for Honolulu-based Territorial Savings Bank, which slipped 0.2 percent.

Melton, who typically favors stocks with strong momentum, picked up a 7 percent gain from Apple in the second quarter but was stung by losses of more than 20 percent on his other three holdings, including a 32.1 percent decline by coal producer Alpha Natural Resources. Still, Melton decided not to make any changes for the third quarter in his portfolio.

“I’m cautious going forward,” he said. “For openers, housing’s pressures are mounting on both the building and sales fronts in wake of the recent expiration of tax credits for homebuyers (even though those with signed contracts now have three additional months to complete their purchase).

“Housing is not all that is restraining the upturn, though. We’re also seeing reluctance by consumers to spend, lesser contributions from fiscal stimulus, and further weakness overseas, particularly in Europe.”

Types of Annuities

There are various types of annuities, each with different benefits, depending upon where the assets are invested and when payments begin. A “fixed” annuity, for example, provides a specified rate of interest for a period of time, while a “variable” annuity offers greater opportunity for growth but also comes with higher risks. Other types include “indexed” annuities, “deferred” annuities, “single premium” annuities and “flexible premium” annuities. Keep in mind that the cost of these products often is directly proportional to their complexity – the more complex, the more money someone will pay for the product and, typically, as happens with complex products, the less a customer will understand what he or she is buying.

I’m not generally a big fan of annuities, mainly because they are expensive, have potential negative tax consequences, and are complex and confusing. For clients who come to us already owing an annuity, I’ve often asked them general questions about it, and they looked at me with glassy eyes and said they hoped I’d tell them. Without getting into to all the details and nuances of the different types of annuities, the following are some of the pros and cons of owning them in your portfolio.

Pros to owning annuities:

• An immediate lifetime annuity contract can guarantee periodic payments for life (main risks are inflation and the credit-worthiness of the company)
• Provide an option – compared to CDs – for those who are risk-averse and don’t want to risk losing part of the savings (fixed annuities still have credit and inflation risk)
• Provide a steady source of income
• Allow investments to grow tax-deferred (qualified and non-qualified annuities)
• No restrictions on who can invest (anyone can purchase a nonqualified annuity)
• Can be customized to fit your needs
• The sum value of some annuities are guaranteed to be at par or greater than the value of the amount invested (variable annuities – this benefit usually comes at a very high cost)
• Are backed (in some cases) by state guarantee funds, so if the company cannot pay, investments may not be lost (vary by state)

Cons to owning annuities:

• They are very expensive! I haven’t found one client who wasn’t completely shocked when we pointed out the fact they were paying (in most cases) between 2.5% and3.5% per year for their product
• Offer (mediocre) insurance coverage (one of the biggest selling points)
• Investment options are restrictive to mutual fund subaccounts that are often very expensive on their own (variable annuities)
• A big selling point is the tax-deferred savings, yet I find other retirement plans (especially employer-sponsored 401(k) plans) a much more attractive, less costly, less complex, simpler means of funding for retirement
• Lack of liquidity – funds are often tied up for six to eight years and are subject to a sizeable “surrender charge” if withdrawn early

For retirees, an annuity offers an assurance of a stream of income for life or for a specified period of time. For those who fear the potential loss of their money due to poor investment choices, that “guarantee” can be attractive. Keep in mind that that while the annuity income can look big, a good portion of the annuity’s income is a return of principal. The problem with buying into this (and paying too much for that guarantee, in my opinion) is that there are numerous other options that are typically more flexible and suitable that should be explored. But in the end, if having an annuity will help someone sleep better at night and bring them peace of mind, then a diversified portfolio manager at FIM Group can help find low-cost/low-load products that do not, for example, charge surrender fees or have very low expense charges. There are a handful of good products on the market, and we can help provide the due diligence before buying.

If you currently own an annuity, or are interested in learning more about these products, please feel free to call one of FIM Group’s advisors. We’d be happy to explore whether or not an annuity may be appropriate for you.

Protecting Your Assets

The majority of FIM Group accounts are held with Charles Schwab and Co., Inc., our main custodian, we feel that now is an appropriate time to remind our clients about the internal protective practices and stringent standards taken by Schwab that are designed to ensure the safety and security of your hardearned assets:

• Keeping Client Securities Separate from Broker-Dealer Securities – Client securities – such as stocks and bonds that are fully paid for or excess margin securities – are segregated from broker-dealer securities, in compliance with the SEC’s customer protection rule. In the unlikely event of insolvency of a broker-dealer, these segregated assets are not available to general creditors and are protected against creditors’ claims. This is a legal requirement for all broker-dealers.
• Account Protection by the SIPC and Lloyd’s of London – Schwab’s asset security measures offer protection for securities and cash by the Securities Investor Protection Corporation (SIPC). All Schwab accounts are insured by SIPC for securities and cash in the event a broker-dealer fails financially.Additional brokerage insurance is provided through underwriters at Lloyd’s of London. This additional protection becomes available in the event that SIPC limits are exhausted and there are no additional funds available from the estate of the failed brokerage firm.
• FDIC Coverage – The Federal Deposit Insurance Corporation (FDIC) is a U.S. federal agency that protects investors against the loss of their deposit accounts (such as checking and savings) in the event of the failure of an FDIC-insured bank. All deposit accounts held at Schwab Bank, including the Schwab Bank High Yield Investor Checking® account and the Schwab Bank High Yield Investor Savings™ account, are FDIC-insured.
• Information Security Measures – In addition to protecting clients’ assets, Schwab is committed to protecting client privacy and safeguarding information. – To learn how Schwab protects client privacy, visit >www.schwab.com/privacy – To learn how Schwab keeps client personal and financial information safe online, visit www.schwab.com/schwabsafe – To learn how Schwab plans to provide continued client service in the event of disruption to normal business operations, please visit www.schwab.com/businesscontinuity.

Invest with a margin of safety

Recently several FIM Group managers presented a webinar in which we discussed the markets, economy, investments and Roth IRAs. One of the topics we touched upon involved giving investments a margin of safety. Great investors are naturally disciplined toward investing with a margin of safety. Investing icons like Sir John Templeton and Warren Buffett, for example, talk about importance of discipline and a process of evaluation to ensure that a significant margin of safety exists for every investment made. For many investors, price is the best safety enhancer. For example, if you buy a dollar bill for 50 cents, you have less risk than if you paid $2.00. What a company is worth, of course, lies in the details and complexities of the “What is it worth?” decision. You need to evaluate if you are paying less than what it’s worth with a degree of safety that compensates you for the risk and possibility of making a poor investment choice.

At FIM Group we use both soft and hard – qualitative and quantitative – techniques when making the “What is it worth?” decision. Since the numbers are the easy part, as they are the known variables, we spend a lot of time on variables such as management, ethics, industry, product and product strategy analyses. All of this bakes into a decision that potentially involves hundreds of decision tree branches.

Based on past participation, the most popular webinar we’ve conducted to-date is titled “What’s in My Portfolio and Why?” FIM Group will continue to host webinars on relevant investment topics. Visit www. fimg.net for the most up-to-date webinar information, and be on the lookout for e-mail alerts announcing upcoming webinars. If you prefer, or if it’s easier than accessing an online webinar, you may contact any FIM Group representative, and he or she will send you a CD that you can review anytime.

What gives an investment a margin of safety?

• Sort through Millions of Opportunities
  (50,000+ stocks)
• Good Management
  (If Steve Jobs Took Over GM)
• Good Industries
  (Health Care, Food, Energy, Entertainment)
• Good Ethical Values
  (Transparency is Reality)
• Good Companies
  (Fad or Needed Goods & Services)
• Good Products and/or Services
  (Make Great Companies)
• Good Balance Sheet
  (Little Leverage)
• Free Cash Flow/Income
  (Cash to Reinvest or Pay Dividends)
• Skin in the Game
  (Insider/Family Ownership)

KEY

Buy and sell at the right price.

BOTTOM LINE

Prices fluctuate due to the liquidity of the markets, instant emotional responses and crowd behavior.

Volatility is a friend of the wealth-creating investor.

In 2009, the American Wind Energy Association reported that the U.S. broke a record by adding 10,000 MW of new capacity that can serve more than 2.4 million homes. The U.S. Department of Energy recently announced its goal of obtaining 6% of U.S. electricity from wind by 2020 – a goal that is consistent with the current rate of growth of wind energy nationwide.

At FIM Group, we believe wind energy will be a strong sector in the future; therefore, we devote time to actively research, analyze and invest in both the wind and energy sectors. Many FIM Group’s diversified portfolios hold numerous companies that are involved in wind energy and other areas of energy creation and distribution Many companies, like the U.S.-based Otter Tail Corporation, operate with several subsidiaries that provide diversified energy product offerings. Otter Tail’s subsidiaries include:

Otter Tail Power Company, which provides electricity for DMI Industries, which manufactures giant steel towers for the wind energy industry Aevenia, Inc., which provides design, procurement, project management, installation, maintenance and safety to cover every vital phase of a project. Companies like the U.S.’s Exel Energy, Australia’s Infigen Energy and Europe’s Energias De Portugal all invested in wind farms and sell energy resources to customers in their respective markets.

What do we look for in our wind and alternative energy investments?

• 1.) Stellar management
• 2.) Good market area
• 3.) Conservatively managed balance sheet
• 4.) Reasonable regulations
• 5.) Riversified product offerings (gas, hydro, wind, solar, etc.) and/or geographic diversification
• 6.) Solid cash dividend supported by current cash flow and future earnings New Tax Law Regarding IRAs
• 7.) Priced right – this area has a tendency to get overpriced as overzealous “Wall Street marketers” hype stock prices to unreasonable levels

Thankfully the market tsunami of early last year brought energy stocks down to reasonable levels and in some ways separated the common-sense winning strategies from those that were inflated on hype. We are pleased that we were able to buy such a quality portfolio of solid energy companies at great prices. Some of FIM Group’s client holdings include: Criteria Corp, Pargesa and Cheung Kong Holdings, which provide exposure to both traditional and alternative channels of energy. For example, Hong Kong-based Cheung Kong Holdings owns a large chunk of Hong Kong Electric, which built Hong Kong’s first commercial-scale wind farm – Lamma Winds.

Notable examples are Toyota and the US Auto industry. For years, Toyota focused its efforts on building quality and reliable vehicles. However, when their focus changed to becoming the largest automotive manufacturer, they subjected themselves to very serious consequences, which we’ve all seen in the news lately. The destruction of the U.S. auto industry was a result of upper management’s desire to use financial leverage to increase share prices at the expense of building quality vehicles at affordable prices. The new set of organizational pressures and incentives, with few options to obtain goals with legitimacy, has altered judgment and choices. Today, there aren’t as many “car guys” in upper management positions at the auto companies. Rather, financial engineers seem to have taken over.

Finances are indeed important, but from my experience those companies that put their customers’ needs first run a conservative financial profile. Any reasonable and educated person with an ounce of common sense knows that the world is always changing. Common sense managers know that customers’ wants will change, innovation will make last year’s products less desirable, and that customers and clients need quality products and need to be treated with respect and gratitude.

Growth in Earnings per Share (EPS)

It seems that private companies do a much better job with a virtue-oriented business model than public companies, with is rational. Public corporations are judged mostly on growth in earnings per share (EPS), profit growth and shareholder return. As an investment manager we want to invest in companies that place value and emphasis on their product or service and who care about their employees, shareholders and other stakeholders with equal reverence. We also seek out family-owned/ operated companies in which the major shareholders are the families themselves.

Anecdotally it seems that companies with conservative finances and virtue-oriented management think that paying their shareholders good cash dividends is just good business. At FIM Group, we seek out companies that pay good dividends, have a history of paying dividends, are well capitalized, have conservatively managed financial structures and have a record of profitability coupled with great quality products and services.

We also project into the future and anticipate whether we can see companies’ cash flows and dividends increasing over the years. There are a significant amount of parameters that go into selecting a stock for a diversified portfolio; however, dividends are an emphasis, particularly for those clients who are near retirement or are enjoying it currently.

It Pays to Be Global

FIM Group has always been a global manager. When it comes to dividends, global is where it’s at.

Cash dividend yields an average dividend yield of 6.39%. To give some perspective, the current dividend yield for the S&P 500 index is just 1.84%. Since 1926, 45% of the U.S. total return from the S&P 500 was from dividends. From that we can logically assume that even in our robust growth booms in the 1950s, 1960s, 1980s and 1990s, dividends do matter. In the rapidly growing economies and companies we favor, we expect (especially for retirees who need cash income now, not growth later) a similar positive end result.

Four Winds of Positive Performance

There are four return components for a global investor: 1) Dividends; 2) Growth in underlying share value through increased earnings; 3) Increase in share value as investors are willing to pay more for those earnings (PE expansion); and 4) Currency returns. For example, if you own a Swiss, German, Singapore or non-U.S. company, there is potential for capital appreciation purely by the U.S. dollar weakening against the currency. Of course it could go against you, and as we know currencies, investors’ psychology and earnings can go up and down, and if a company’s prospects or markets weaken dividends could be reduced or eliminated. That is one reason FIM Group believes indexing portfolios is a losing strategy. Why wouldn’t you want to sell investments as their prospects erode and embrace investments with good prospects? The asset allocation chart by country indicates FIM Group’s investment around the globe. Our portfolios are well-diversified and actively managed, which helps reduce volatility and increase the potential for steady returns over time.

Adam Smith and Doing the Right Thing

I am a believer in free market capitalism. I am also realistic about human nature and realize that many people will be driven by greed, ego, lack of a moral compass or plain ignorance. Many unethically manipulate the “system” to their benefit at the expense of others. Typically unethical business practice involves the cooperation of others and reflects the values, attitudes, and beliefs that define an organization.

According to Stephen Young, global executive director of the Caux Round Table, an international network of principled business leaders working to promote a moral capitalism, “Moral sentiments stand for the proposition that listening to our moral sense, exercising our capacity for sympathy for others, and listening to an inner source of wisdom is the proper standard for human conduct. Wealth of Nations, by Adam Smith (1776) on the other hand, is often portrayed as a work that elevates self-regard as the proper norm for our interactions and that proudly grounds capitalism on self-seeking of profitable advantage.”

Humans naturally seem to know right from wrong, and Adam Smith felt that people would be guided on balance by moral- and virtue-oriented principals, either self-imposed, or socially imposed by religion, government or laws. I grew up being taught to do the right thing, and as a result an underlying tenet in FIM Group’s philosophy is to favor companies that seem predisposed toward doing the right thing.

I have been reading How to Create a Winning Organization by John Wooden and listening to his audio book about his philosophy. Coach Wooden’s ten NCAA championships, Coach of the Century Award and pyramid of success prove that having a well-developed moral compass results in success – but as he says, that is not the point – the point is doing the right thing.

We believe the majority of Americans and Europeans want their companies and employers to grow, be sustainable and operate ethically. It appears that in many areas of the world, governments view business as a necessary evil or maybe just simply an enemy. Demonizing entrepreneurship, success and business will only cause business to go elsewhere, where it is welcome, and people feel grateful that they have a job. While the creative destruction going on in the old economies of our world are unpleasant, governments do little to fix it and a lot to mess it up. Regulating to deregulate and adding taxes upon taxes only discourage companies and form a barrier to long-term economic success. Vital and vibrant business activity will go on, and profits will be made by those with the vision, desire and ability to work harder and smarter. FIM Group’s investment process is designed toward investors who are well-compensated for taking on risk and who have a reasonable and sustainable margin of safety.

Imagine that your portfolio is constructed in such a way that even if the economy just quit growing, taxes increased and inflation doubled, you would not be concerned at all about your investments! Imagine further that if we experienced significant deflation, increased unemployment and government debts skyrocketed out of control that you still would not be concerned. We feel that every FIM Group portfolio is truly constructed to do well even if the normal economic and financial forces of recession, inflation, deflation, tax increases, unemployment, deficits and such continue. Why are we so confident? The reason is HEF.

HEF = Health, Energy, Food

We have our stock selection investment process that continuously guides our choices. When we bake in all the inputs, we find that our portfolios are well-positioned to benefit from three areas of the economy – health, energy and food/commodities. What was a blessing in disguise about last year’s financial tsunami was that it regarded both great and bad investments in the same way … it made them all cheap. It made great companies in the health care, energy and food businesses investment bargains. It also made companies in the areas of the world that are on the right side of the deficit’s paradigm bargains. If you look at your portfolio and drill down on the “why” of your portfolio’s holdings, you will find investments with great prospects regardless of how the overall economy, stock market, inflation or governments of the world performed. Of course they will fluctuate. Of course they will have volatility. But every year thousands of companies disappear. Our investments aren’t with speculative companies that were constructed in cyberspace and passed off as investments. They are solid companies with good books of business and in industries where they have created a hard-to-replace niche, competitive advantage and are well-priced. We expect that these companies will grow earnings, dividends and sales over the next five years. Will they have some bad quarters? Yes! Will their sales fluctuate? Yes! What follows is why we believe the trend will be up.

Human Nature

Darwin maintained that those species that survive and thrive are not necessarily the biggest or the smartest, but are the most flexible. Humans survive because we are flexible. Americans are modifying their behaviors due to our recession. People today are using coupons, consolidating shopping trips and “brown-bagging” it at work to save money. It’s now “cool” to be frugal.

It’s Cool to Be Frugal

More than ever people are becoming turned off by excessive consumption. For example, current luxury automobile advertisements are not pushing the “look at me, I am successful” button to compel consumers to select their brand. They are pushing the safe, value and durability buyer buttons. In other words, they are appealing to practicality versus stature. We are allowing our brand loyalty to slide in the name of common sense and frugality. Store brands are consistently gaining market share as consumers shop for better value. Private label growth demonstrates the significant decrease since January 2008. Also, consumers are making it more difficult to target and effectively receive marketing. Advertising was down significantly in 2009 as consumers made different choices and spending decreased. Advertising spending worldwide has been affected by the slow worldwide economy and recession.

One Company at a Time

At FIM Group, we select each investment because we feel it will deliver positive returns going forward. We favor the companies that have solid management, produce needed products and will benefit from the trends in both the developed and developing worlds.

Often it can seem overwhelming to view all the holdings in your portfolio. We welcome the opportunity to sit down in person or on the phone to discuss what you own and why. We have found that once clients really understands their portfolio, they sleep better at night and really see the benefit with our strategy. Please don’t hesitate to call or e-mail us to coordinate a time to review yours.

My brother dropped by my house recently and said, “Did you know Warren Buffett is a Buddhist?” “Yes! He said that emotional peace is one of the keys to his success!” We chatted about that for a while, and then I told him about another investor who had virtue written all over him – Sir John Templeton. There is no single investor who has had more influence on our firm’s wealth management advisor “old-timers” – namely, Jeff Lokken and me – and our investment philosophy. In his foreword to the book Investing the Templeton Way, Templeton stated that he relied on the following motto throughout his investing career: “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.”

While he did not specifically mention “inner peace,” I think Templeton’s use of the word “fortitude” communicates the same message. Templeton, like Buffett, didn’t allow the noise of politics, self-serving Wall Street and the hype of investment fads to sway him from his mission. Both he and Buffett stayed true to their investing theme of searching worldwide to be compensated for taking on the risk of investing, and to be goal-oriented – not fad-oriented – in their investment approach. I can find little approval for indexing, benchmarking, passive asset allocation, laddering, hedge fund leveraging, using trust companies as advisers, or consultants that can give you history but not discuss the future.

Both Buffett and Templeton knew about the future, and both had The Intelligent Investor by Benjamin Graham (1949) on their bookshelf.

Sin of Sloth

Growing up, I attended catechism classes at St. Phillips, but I was not allowed to go to confession because I lacked one important criterion – I was not Catholic. So despite giggles and notes being passed during class, I managed to learn a bit about sin and virtue. The “high scholars” we were, we interpreted sloth, one of Catholicism’s “seven deadly sins” as simply, doing anything that we found fun. While the priest talked about attractive, seductive distractions and how they could lead us to sin, we of course thought about those attractive, seductive, distractions and let the sin part lie at the steps of St. Phillips.

Today, I realize that I have recently succumbed to the sin of sloth. Over the past few months I have allowed myself to get caught up in a dialogue that really has little to do with investing, but which both Jeff Lokken and I love to discuss: politics and political economy. While politics does have something to do with investing, it is not investing, and it certainly is a waste of time to spend valuable newsletter time writing about politics. In other words, it is part of the landscape, but is not the landscape. Chatting about tax laws, Obama’s philosophy on health care, McCain’s fix for the banking industry or Clinton’s Internet globalization agenda, while useful and seductively interesting, is in large part a waste of time in the world of investing.

Politics in Perspective

Global political dialogue is interesting and can indeed influence capital flows, but it is merely one input among thousands than can affect investing. And for investors to concentrate their efforts on the political influence on any one investment, then, really is an insidious, irresponsible, slothful waste. Americans seem to especially enjoy wallowing in politics, the slimy underbelly of our American life. My gosh, if you’ve listened to talk radio or Fox News lately, you would think that the future of capitalism and the free world rests on the ability of unions, associations and businesses to continue to buy votes unencumbered, which of course concerns us here at FIM Group as Americans, but really just helps certain industries and creates barriers for others. So I confess I was slothfully giving various political commentators more time than they were worth. America is too big, and we are too smart to let a few Republicans or Democrats ruin our democracy or capitalism for that matter. Capitalism is what works in the world. It is messy, politicians will mess with it, populists will sway the masses, large businesses will create barriers to competition and creative destruction will happen in America because we are capitalists.

Templeton’s ’10′

Back in the 1970′s, we set out to find our place in the overhyped, seductive, oversimplified world of investing that was full of guaranteed annuities, “Nifty Nifties,” blue chips, gold bugs and real estate partnerships, and we felt that Sir John Templeton’s long-term, values, virtue and common-sense approach would be our fort. Templeton had 10 maxims* that we incorporated and made our own. While Sir John may no longer be with us, his words are as timely today as they were back then and, of course, we have now nearly 35 years of working on the fortitude and inner peace bit of his core teaching.

1. Invest for real returns  - The true objective for any long-term investor is maximum total real return after taxes.
2. Keep an open mind – Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded and skeptical.
3. Why follow the crowd? – If you buy the same securities as other people, you will have the same results as other people… To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.
4. Everything changes – Bear markets have always been temporary. And so have bull markets.
5. Consider avoiding the popular – Too many investors can spoil any share selection method or any market timing formula.
6. Learn from your mistakes – ‘This time is different’ are among the most costly four words in market history.
7. Buy during times of market pessimism – The time of maximum pessimism can be the best time to buy, and the time of maximum optimism can be the best time to sell.
8. Hunt for value and bargains – In the stock market, the only way to get a bargain is to buy considering what most investors are selling.
9. Search worldwide – If you search worldwide, you will find more bargains and better bargains than by studying only one nation.
10. No one knows everything – An investor who has all the answers doesn’t even understand the questions.

I believe that because of John Templeton’s deep faith and worldview, he felt it was self-evident that virtue, ethics, honesty, transparency, a common good orientation and sustainable business models were important and should be included in any investment philosophy statement. I also believe that he felt that adding them to his maxims would be as redundant as reminding an adult to “play nice.”

If you interested in reading the book Investing the Templeton Way; The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter e-mail info@fimg.net. This e-mail address is being protected from spambots – you need JavaScript enabled to view it – or call 231.929.4500, and we will be happy to send you a complimentary copy. Additionally, you can also get in touch with a FIM Group diversified portfolio manager via through this email or phone number.

America’s Relevance

FIM Group has always been about investing globally, so it is nothing new for our clients to hear about the robust opportunities that exist all over the world. In some ways I think that the world is realizing that the good ‘ole USA is not as necessary to their security, safety, well-being and economic prosperity as it once was. There is a new generation globally, and they have little patience for the stories told by their old folks of how the U.S. helped in their country’s development. I think the U.S. got lazy. Now after many years of benign neglect our political clout, through an unfocused and politicized myopic foreign policy, especially around economic issues, has helped us lose some of our relevance in the world. In addition, the world (especially Asia) has simply grown. What is heartening to me as a proud American is that as a percent of the world’s big, fat economy of around $60 trillion, the U.S.’s share has been pretty constant. Europe has been the bigger GDP loser, and while Africa and Latin America have had benign growth, Asia has been where the big change has taken place. Asia is coming into its own, saying, “Hey, we are relevant, we are strong and we can sit at the table of the world’s richest nations because we earned it!” Like a teenager that forgets all the help and guidance of the parents, Asia (as will other countries as they develop) will wish to cut the umbilical cord to the West and with national pride be indifferent to those who helped them along. The talk show hosts that got mad at France, chatting of boycotts and changing the name of “French fries” a few years ago for differing with us on our foreign policy, are a good illustration of this. The U.S. exists because the French helped us kick the English out. It’s that simple! Most of Asia exists because 60 years ago we helped China and other Asian countries defeat Japan’s armies.

About 16 years ago I was on a rickety boat off the coast of Mersing, Malaysia. An older man who was navigating among the fishing vessels in our small boat heard my American accent and said, “Oh, you’re an American! Thank you! I vowed to always say thank you to every American I meet for all the help you gave our country.” I am a proud American because of encounters like that. However, in the world we see today, our military influence has much less clout in today’s world where economics rules. The free world today gets a free ride on America helping to police the world, and just as Rome, England and the warrior Kings of Africa learned, military might does not tend to evolve or help maintain economic might. Healthy countries want to take care of their own security needs; naturally they will take our help for free, even if they don’t need it. The economic drag of America’s war machine, the conflicts in which we are engaging, our aging population … all these things will contribute to the fact that big opportunities for our wealth is overseas, in countries with lower taxes, younger work forces and lots of room for development.

I hope that my comments will not make readers feel worried, sad or even angry. They are not intended to be political, and they should not be taken as a statement of my personal political opinion. The U.S. needs a strong defense, because the world is an unsafe, scary place. There are plenty of people who would like to see the West destroyed. Fortunately we can afford to have a giant military that costs more than all other defense spending in the world combined. But, unfortunately the cost is growth, our clout in the world, higher taxes and our brave men and women fighting in Afghanistan and Iraq.

We Are Rich!

According to the UN News Centre, America has around $144,000 in wealth per capita vs. the global average of $20,000 average and just $1,100 in India (data based on the year 2000). Both the U.S. and the world’s wealth have grown since then, but we still are the richest country per capita.

America is so rich that even though we have some erosion effect from our burgeoning government spending and aging population, we will always be rich. We work hard, believe in education, solve problems and learn from our mistakes. Right now we are finding our place in the world with wars, a new president, special interests and a plethora of other issues. It is natural that our foreign policy will be centered on the handful of countries with whom we are fighting. Meanwhile, China, Europe and others have policies that nurture relationships with resource-rich nations, and the buyers of their goods and services ensure their future growth. Bottom-line growth in America will be slower than elsewhere.

Invest Slow or Fast? Easy Choice

Investors are silly folks. They are collectively stubborn. Because of endowment behavior most investors will stay with an investment even if they expect it to under perform, because their brains are wired to do so. Many investors will naïvely invest in benchmarked or indexed portfolios of mainly U.S. stocks or bonds even though they know that many areas of our economy, such as real estate, retail and banking, have crummy prospects. They will stay in U.S. bank CDs even thought they believe the U.S. dollar is destined to continue to erode in purchasing power and inflation is most likely around the corner.

It is rational to have a diversified portfolio, and we are believers in diversification. With more than 50,000 stocks and millions of bonds to invest in, an investor would be either silly or lazy to choose investments that they know have poor prospects going forward, like U.S. banks and real estate. So sometimes when I am lying awake in bed, I reflect on our investment year and ask, “What am I missing?” It seems so rational that there will be – although lumpy – growth in energy, food, agriculture, health care, telecommunications and emerging countries, and that inflation with pockets of deflation is most likely in our future. Therefore, those are the themes that are well-represented in our diversified portfolios.

Retired and Portfolio-Dependent Clients

Many of our clients are retired and dependent on their portfolios for income now and in the future. That future might be the next 40 years or next month. I can tell you with certainty that the future will have inflation, deflation, recessions, corporate scandals, Wall Street greed, war, booms and changes in tax laws, high interest rates and low interest rates. Dividends will be taxed a little, and they will be taxed a lot. I can tell you that thousands of books and tens of thousands of articles will be written stating the absolute best way to invest. I also can tell you that most investors will fail to meet their goals, because they fail to have a common-sense long-term view, and clear goals and objectives of what they expect from their portfolios.

At FIM Group we are guided by a common-sense philosophy and fiduciary duty, and each portfolio has goals and objectives that are built into their construction and management. Investors not guided by goals and a long-term view often panic in crashes and are seduced by slick salespeople and logical-sounding strategies (note the Dalbar chart on the right).

Lying in bed, in my head, I go over each portfolio’s position. I ask myself, “What if we have hyperinflation, another crash or a super-strong economy?” Or, “What if rates stay near 0% for money markets, CDs and other so-called ‘safe’ investments?” CDs and the like don’t give inflation protection, nor do they protect against U.S. dollar weakness or an eroding currency environment. I scenario out the possible futures and “stress test,” so to speak, our portfolios against each scenario.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.

A: We are long-term investors, not market-timers. We look for long-term bargains and do not try to time the markets. We must allow for our portfolios to fall during downturns in order fully participate in the long-term benefits of our wealth management. Because of market cycle fluctuations, the money we manage should be viewed as long-term money. As for retired clients who take income from their portfolios, they need to understand our goal is long-term growth of income, not short-term market timing. That said, a normal by-product of favoring investments with higher-than-average dividends, cash flow, balance sheets and price-to-value fundamentals in normal market downturns generally provides a downside cushion.

Q: What is the impact of the U.S. dollar dropping in value, and how do we protect against it?

A: In addition to inflation, another result we anticipate from the stimulus actions of our government, namely extremely low interest rates and massive borrowing/spending, is downward pressure on the U.S. dollar. This phenomenon also has dual outcomes. A devalued U.S. dollar makes domestic goods and services less expensive to countries with stronger currencies, which should make American businesses more competitive globally and thus stimulate our economy. But for consumers at home, it means that nearly everything we buy will become more expensive due both directly to increasing costs of foreign products/labor and indirectly to increasing prices of purely domestic competing goods and services. Foreign-denominated assets, such as foreign-listed stocks and bonds, directly increase in dollar terms as the dollar falls. FIM Group, however, does not invest in foreign investments merely because we are predicting the direction of currencies. As a matter of fact, we require a higher margin of safety in the prices of the foreign investments we buy specifically because of the added risks currency fluctuations may present. We currently invest in foreign economies and companies that we feel are poised to benefit from local, global and company-specific factors, resulting in our portfolios benefiting from a weakening dollar.

Q: The financial industry has convinced many investors that “markets are efficient,” “you can’t beat the market” and several other “truths,” so why should an investor pay fees for active management?

A: It is indeed true that 80% of the so-called money managers (actually mutual fund managers are the universe used in such studies) under perform the average (i.e., the market indexes). But that does not mean markets are efficient. Nor does it mean that the approaches used by the mediocre managers are anything but mediocre. Mediocrity, plus mutual fund constraints, minus fees equals lackluster performance. No argument here. But what about the other 20%? Using this theory implies that on any Sunday every football team has the same odds of winning as every other team. It implies that Tiger Woods, Roger Federer or the New York Yankees have the same probability of finishing in the top half of the pack as the bottom. The fallacy in this logic seems obvious to most people when talking about sports or other fields, yet some still believe that investment success is random. Tiger, Roger and Mr. Steinbrenner all have systematic competitive advantages.

So do investment managers who employ time-tested techniques and skills such as favoring securities with the qualities mentioned above and avoiding securities that are either overpriced or have headwinds to overcome. Yes, Tiger misses the cut sometimes. Yes, managers with solid long-term performance have periods where they under perform some arbitrary index. But in the long run, time-tested disciplines provide better returns with less downside risk (on average!) than random investing. In the case of FIM Group, we missed the cut in 2008. But we have regained ground lost to most arbitrary benchmarks (such as the S&P 500) in 2009. Nevertheless, one year versus another is not what counts. What counts are long-term results. For readers who have not been with us for more than ten years, I encourage you to ask your FIM Group adviser to show you our ten-year returns for periods ending September 30, 2009, or ten-year periods ending 2008, 2007, 2006, etc. Past performance notwithstanding, we remain forward-focused. We manage in the present, employing the timely strategies such as those described above. But we remain flexible, with our ears to the ground, and willing to change course as conditions warrant.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.

The other conversation was one of those “bring it all together” chats that connected a lot of dots for me and brought me to an “a ha!” moment. The theme of the conversation was simply that, for entrepreneurs, status – and not money – is a motivator. As a diversified portfolio manager I have always had a significant bias toward investing along with the owners of companies. In Simply, I want to invest along with managers that have a large part of their own net worth tied up in the company. In addition, I want them to have a feeling of responsibility to protect, grow and help their company strive ethically and sustainably, even if for the simple reason that their families’ reputations would be sullied if they screwed up and enhanced if they succeeded.

Virtue

What brings this all to this post is simply “virtue of wealth.” In October, I was interviewed on a national talk show about my latest book, The Virtue of Wealth. We discussed some of the books I’ve read in my teens, Law of Success, Think and Grow Rich and The Richest Man in Babylon. My host had also read those books, and we discussed the idea that success is a choice. Now keep in mind that “rich” is a word full of baggage. For some, all about money; for others, it is less about the money and more about a happy, fulfilling, meaningful and virtuous life.

So that interview got me thinking. Even factoring in 2008′s horrible performance, FIM Group has had a pretty good run over our 25 years. Was it luck or DNA? Naturally our new and prospective clients wrestle with that. What will the next 25 years bring? Thankfully, unlike the athlete who’s athletic prowess decreases with age, investment management seems to get better with age – when done right. When I look at the sages in any industry they are never 29 or even 39 – they were graying before they were ripe enough to be considered sages. I am thinking of John Templeton, Warren Buffett, Charles Munger, Graham and Dodd, and others who just seemed to improve with age. They all seem to have a shared DNA that is characterized by success, passion, intellectual curiosity, intellectual honesty and a desire to see the truth of the situation. Most people, it seems, don’t want the truth unless it suits their bias.

And as we know in the investment business, the truth is very important, because of the sometimes unsavory characters this business attracts. One of my favorite quotes is, “Some minds remain open long enough for the truth not only to enter but to pass on through by way of a ready exit without pausing anywhere along the route.” In other words, “Don’t bother me with the facts, because I have already made up my mind.” In business – especially investing – to ascribe to anything other than the truth is irresponsible.

There is much written as of late about mutual funds, ETFs (exchange-traded funds) and indexing that is frustrating and falsely represents investment management. The allegedly truth-seeking managers or acedemics seem to basically look at nothing that does not support their hypotheses, which are:

1) Markets are efficient
2) Indexing works
3) You can’t beat the market

If their premises are true – that investment management is not worth the effort – then why are they in the investment business? Shouldn’t they just leave and go sell shoes, and let us delusional investors keep being outliers as we “beat” the market (or not).

Talent and DNA

Does talent exist? Is the investment process worth the effort? Are there great managers? Is Steve Jobs a great leader, or is he just lucky? Of course the core of this argument comes back to reputation, capital, intellectual honesty and the DNA issue. If you believe greatness exists, if you believe that talent exists, if you would rather have Tiger Woods as your golf partner than me, then you most likely are in the DNA and talent camp. If you believe that it is hard to identify talent, that excellence is more about luck than talent, training, DNA, passion and virtue, then accepting mediocrity and going the passive investment route is probably more your style.

So how does this relate to investing? At FIM Group we look for companies managed by passionate, ethical and talented people who have skin in the game. We want companies whose managers and board members have a significant part of their net worth invested alongside their shareholders. Naturally we can’t be fanatics, because there are many wellmanaged, successful companies without significant insider or family ownership. However, in Asia and Europe we look for significant family ownership. Keep in mind that just because a family’s reputation is on the hook it doesn’t guarantee success. Ford Motor Company is a good example. Ford looks to be rising from the ashes; however, with billions of dollars of debt, the current management team has its hands full. I wonder what Henry Ford would think of what has become of his company that once was flush with billions in cash and now is mired in debt.

Examples of attributes we like are those of Apple, run by Steve Jobs. His reputation is tied to the company, and his 5.5 million shares of this $200 stock make it more than apparent that he is motivated toward continued success. We don’t currently purchase Apple (AAPL) for our portfolios, but if its price got to where we felt it better reflected the competitive environment, we would not hesitate to own the stock. Today AAPL is a cult stock, and its price to its sales is nearly six times greater than Nokia, another great, wellmanaged technology company. Today, for various reasons, including valuation and price, we would rather own telephone companies like AT&T and leverage off Apple’s successful iPhone.

Optimists Win

I write a column for Spirituality and Health magazine, and my last column was about optimism. The column’s catalyst was an issue of Business Week that discussed the power of optimism. (Business Week now has a website dedicated to optimism and the economic recovery.) We all know successful people; they are optimistic, they strive, they look at setbacks as opportunities, they play to their strengths and usually, humbly or not, they have a desire to overcome their weaknesses for success. So what I think brings success to a company or any organization is, of course, all of the attributes we discussed above. Talent, training, DNA and virtue are needed – but they need one additional element: optimism. The virtues discussed (and some not discussed, like “leadership”) are all great, but to create anything lasting they need to be energized with an “I can/we can” optimism. Just reference Winston Churchill about the importance of optimism.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.