We wanted to touch base with you with a few thoughts now that the year has almost come to a close.

No one needs a reminder that global economies and financial markets were in very poor health for the past twelve months. However, it is important to remember that recessions and bear markets do not last forever and do eventually recover. In fact, the first 12-18 months of recovering stock markets are typically exceptional. Our research suggests that such a recovery in global stock markets may begin within the next two to three quarters, and we are preparing for that possibility.

2008 was a year that reminded all investors that, while investing for long term growth is imperative, managing risk is equally important. Our Active Risk Management, which combines higher than normal cash and bond balances with sector management and the use of stop losses, proved that risk management is essential in difficult years like this one. Though this process does not completely prevent a reduction in portfolio value, it does reduce declines, allowing you to have more capital to invest in a rebounding market.

2008 was a year that should remind all investors that investments that lack clarity carry significant risk. This includes the structured products sold by investment banks, pooled mortgage securities sold by banks, and blind investment funds and pools run by the likes of Bernard Madoff. Each of these investments, though heralded as top historical performers with promises of the same in the future, proved to have devastating results. It is important to remember that your portfolio here at Main Street Research is what we describe as “organic”. There is tremendous clarity in the individual securities that you own and the high quality global companies and institutions that they represent. Moreover, we have the ability to manage the risk of each of these individual positions.

The past year also highlights the effect of fees on performance. Investments that are “perceived” to be sophisticated (and opaque) usually carry significant costs - upwards of 2%-5% annually, if not more. Keeping these investments out of your portfolios, in combination with our lower than industry average management fees, prevents the negative effect of fees on your investment performance.

It has been a tough year. However, we have weathered the storm better than many investors. We are prepared for the coming year and we look forward to it with cautious optimism.

Beginning with this quarter, we will now be sending our quarterly letter to you by e-mail as well as including it in your quarterly statement. Our thought is that this will provide you with more timely communication and we hope you find this change helpful.

All of us wish you a happy and safe New Year.

Sincerely,

James E. Demmert
Managing Partner