Class Notes February 2002

This is an expanded version of a Classnote that will appear in the Dartmouth Alumni Magazine in February. Receiving reports that some classmates are hurting financially from the recession and other post-Sept. 11 economic developments, I approached some of the class financial gurus for any advice they might give to classmates about the present situation. Some of the talks were short interviews, but in two cases, Barry MacLean and Roger Schaefer, I received e-mails of considerable length. The note itself is a little more than 500 words. This web site entry contains most of what each classmate said, and is decidedly longer. I hope class members find it interesting.--Ken Reich, Class Secretary

The expanded note:

These aren't easy times for many classmates, on the cusp of retirement when stocks are down, money market rates are low and some businesses are in the tank. So what is the advice of some leading class financial gurus?

ROBERT ARMKNECHT, senior vice president of Fleet Investment Advisors, Boston Mass. "In many cases, people who have gotten to our age have a substantial nest egg. From a financial point of view, this has been an annoying speed bump. On the other hand, people have reached the end of their economic productivity. They are at a point, in terms of needs and expectations, that they can't take the risks they once could...Someone with a good job and several years of employment in front of them can take risks. We no longer can, and our equity portfolio may be down 35%. In terms of coping, to avoid the word advice, I've tried to have a secure stream of incomes, whether it be a quasi-annuity, a pool of money that would act like an annuity, that would provide me with a level of income for an extended period of time. It's awfully important to have an assured stream of income that will pay the mortgage."

GUS LEACH, Winnipeg: "What strikes me is that anyone who's been unexpectedly adversely affected by recent events should review their situation in a very pragmatic and realistic fashion...i.e., don't pull the wool over your own eyes. You owe it to yourself to be as objective as possible, and to explore all realistic options."

HANK GREER, retired CEO of SEI Investments, living in Stamford, CT four months a year and Charleston, SC the other eight months.. "I'm now managing my portfolio, a family foundation, and a little company I help. Asset allocation is the name of the game, so if we're set with that, it's all right. I can't forecast 2002 numbers, but it's scary. Fifteen per cent of businesses are saying they're not going to make their anticipated numbers. and 15% more this last quarter were saying their numbers were not going to be reached. We're going toward flat for 2002. That's what we have to look at. We have to look at tax-free municipals and really be cautious in equity markets now. What will happen with the war is uncertain. We don't know what the war is going to cost. I'm very, very circumspect on where we put investments and equities. We have to be very sophisticated with money management. I started going into fixed income investments. I've gone into munis. I don't trust the market.!

Japan continues to get worse. The other shoe hasn't dropped yet. Morgan Stanley is in the fifth quarter in a row of down estimates. I never owned a fixed income security before, but I do now."

WES ROODHOUSE, in Denver, agrees largely with Hank. "Doing better with what you have is important now. What's important with the economy? First, it takes an engine to turn things around. In the '80s and '90s, everyone needed a PC and all the service companies benefited. That engine hit a concrete bridge in December, 1999. Today, we are at the end of the period where there was a level of comfort borrowing and investing in the stock market. Industry has just overbuilt everything in the world. Everything has stopped. The economic livelihood of our country and the world really is alive, it is dynamic, it's largely going to go where it's going anyway. At this time, we have massive problems with capacity, and there is no more monetary policy. It has exhausted itself, and fiscal policy has exhausted itself too. The tax refund was pouring a glass of water into the ocean. It didn't do any good at all. We're about out of fiscal policy...There's a lot of speculative activity of buying houses at low interest rates. Home equity value has dropped from 52 to 21%. Many people are finding themselves with little equity...I think it's a 85% probability that we're going to go through the worst economic time of our life in the next two years. I feel, terminate risk immediately, absolutely .Sell, get rid of the risk and that probably means selling. Odds are 5 to 1 against things getting better. We need another PC to come along, where everyone has to have one. We don't have an engine in the economy right now, and there's massive credit card debt. The whole mentality is that someone else is going to bail us out, and I don't think it's going to happen. We've run out of all kinds of tools. Wherever the economy goes, it goes. The likelihood is of things getting really, really worse. It's time to preserve capital and get rid of anything that's costing you money. The next leg down is real estate."

But JOEL ALVORD. president of Shawmut Capital Partners, Boston, cautions, "Each person is different. While many have been terribly hurt in the investment business, it's hard to generalize because every case is so different...For those who are hurting in terms of cash flows, this is a difficult time. But rates are down, so it's not a bad time to remortgage your house. Be tough and don't be afraid to renegotiate previous commitments...Sometimes smaller banks will give you much more attractive terms." (Joel said a few other things, along similar lines, but I'm kicking myself and apologize to him, because I seem to have lost them).

BARRY MACLEAN, president and CEO of MacLean-Fogg, Mundelein, Ill., e-mailed, "My focus of comments is built around my knowledge of manufacturing, not the service industry. Having just finished 20 days of traveling the U.S., meeting at our businesses with all employees gives one a certain perspective about how the rank and file feels, my comments are as follows:

1-Bonds have basically been a wonderful investment over 10 years as interest rates with a few exceptions have been dropping steadily--therefore if one feels interest rates will drop further, bonds a good buy. They are also safe and a good place to be in uncertain times. 100$ invested in govts 10 years ago is about 250$ today. And no hair was lost in the process.

2-The economy is ever more global. Invest in companies that have a truly global perspective, product line, and focus. Toyota, IBM, Microsoft, etc. are great global companies. There are many that talk the game but are not.

3-I feel safer investing in U.S. companies partly because the SEC forces full and usually accurate disclosure on the management. Many overseas companies are not required to meet that rigor.

4-Invest your time in things you like, such as your community, etc. Invest savings in places (companies and banks) and people you know. We have had several large customers file chapter 11 this year like Federal Mogul, Trailmobile, Hayes-Lemmertz, Enron, etc. Now we are analyzing balance.

5-Interest rates are the lowest in our business lives. What does that mean? Are we an economy like Japan of 10 years ago-mature and in trouble? I don't think so for a lot of reasons. Even with such low money costs business is holding back on investments. This holdback could prolong the recession.

6-Last time we were in a major recession we asked all our services suppliers for cost relief, lawyers, accountants, etc. all cut their bills by 10% or more. It works personally too.

It certainly is wonderful to live in America."

ROGER SCHAEFER, vice president of U.S. Trust Co. of New Jersey, is the most optimistic overall. His long e-mail says,

A. Investment Principles to Absorb

• "Think and plan for long term. Preserve and enhance wealth.
• Remove personal emotions from planning process. Create discipline.
• Control and reduce investment risk through asset allocation and sector diversification.
• Portfolio diversification.
• Actively manage your assets. Don't buy, hold, forget.
• Stay with quality assets. Don't speculate as much.
• Think tax-intelligent investing.
• Don't be a market timer. Stay invested.
• Stock market is leading indicator. Upward cycle begins by 'climbing a wall of worry' before evidence of economic recovery is noticed.
• Recessions (post World War II) are of shorter durations (6-18 months) than expansions.
• Federal Reserve monetary policy takes hold 6-9 months after last rate outs.
• Note inflation's trend. Today, it's tame.
• Maintain and equity bias to your portfolio balance.
• Buy good businesses. Blend growth and value.
• Keep searching for investment opportunities and value.
• Emphasize long term themes -- demographic, productivity enhancers, business restructuring, globalization, etc.
• Update your will, estate and financial plan.

B. Investment Thoughts After Attack of Sept. 11 (Sept. 12)

• The U.S. Financial system is strong and will continue to function.
• Economic recovery thought to begin 4 Quarter '01 will be pushed off to at least mid-'02.
• Many things will change form here on.,
• Expect a shift in priorities (defense spending, etc.)
• Federal Reserve will continue easy money policy.
• National unity will be strongest since WWII.
• U.S. markets will stabilize after early jolt downward. Don't panic. Stay the course.
• Investors likely to be more risk averse in future. Expect risk profiles and tolerance to change.
• The portfolio of Monday (Sept. 10) may not be as well-positioned after Sept. 11 tragedy.
• Focus on fundamental aspects of investing -- diversification of assets, good business values, preservation of assets, avoid allure of high risk concentration.
• Where NOT to look -- Airlines, hotels, travel, etc.
• Where TO look -- Health care, energy, defense, security, basic industry, railroads, certain technologies.
• Fixed income (bonds), flight to quality, short term treasury issues, corporates (quality), municipals (watch NY and NYC credits). Rates will rise as economy improves.

C. Further Thoughts Post-Sept. 11 (Sept. 17)

• What's ahead.
• Large and rapid increase in government spending.
• Federal Reserve has acted quickly and decisively.
• Foreign markets have stabilized.
• May see weaker dollar as growth of balance of payments deficit increases.
• Inventory recession may be ending but not in consumer areas.
• V-shaped economic recovery rather than expected saucer-shape.
• Look at energy and infrastructure investments.

D. A "barbell strategy" of risk control and diversification. (Oct. 22)

• The world is different. What to own or explore.
• Healthcare -- biotechnology, in particular.
• Defense
• Yield-oriented investments.
• Security
• Mail delivery systems/equipment.
• Energy
• Solid cash generators/large capital companies.
• Depressed price companies, certain techs, software, etc.
• Some contrarian, small exposure to risk (high yield bond fund)

E. Outlook

• Recession to end in '02.
• Worst of market consolidation probably over.
• Economic recovery already partially discounts by market (Dow went from 8,000 to 10,000)
• May see stronger market in First Half of '02 if recovery sets in second half '02.
• May see market "pause" in second half '02 to allow economy to catch up and concerns for struggling global economies digested.
• Do not expect same market returns equal to late '90s. Think total returns of 8%, the long term average.
• To sum up, we are heartened (all of us) by the rapid, sustained and truly heroic efforts of our great country and a great people, and our institutions and system of government will support us. As saddened as we are, I am certain that our nation will recover from this crisis and become stronger as a result."