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We started o 2009 with many questions, ew answers
and the S&P 500 Index at 903. By the end o the rst
quarter, a new administration had been inaugurated,
the S&P 500 had touched 666 (57% below its high o
1,561 in the all o 2007) and recovered to 797, but
concerns remained about whether the credit markets
were nally stabilizing. As we discussed in the economic
overview, we continued to monitor key data that would
give us insight into the availability o money. Steady
improvement in those numbers gave us condence that
the market was poised or recovery and it was time or
us to deploy some o our cash.
Our rst area o ocus was the consumer discretionary
sector. Worries about the health o the American
consumer had caused stock prices in this arena to
decline substantially, creating compelling values ormany o these companies. We purchased TJ Maxx
(tkr: TJX) and GameStop (tkr: GME). TJ Maxx is a
discount retailer that purchases surplus goods rom
other retailers or manuacturers, and then sells them to
consumers or 40-60% less than the original recommended
price. We believe that the company is in an even stronger
position to negotiate prices in the present environment and
that store trac will increase as rugal consumers look
or less expensive alternatives. GameStop is a retailer
o video games. The gaming industry was one o the
ew bright spots in an otherwise bleak 2008. GameStop
sells not only new video games, but has also created alarge secondhand market or used games. In act, used
game sales generate the bulk o the companys prot.
We also added two names in the consumer staples
sector. The rst, Corn Products International (tkr: CPO),
processes corn or end markets ranging rom ruit juices
to adhesives. The stock ell in response to the drop in
the commodities markets, particularly the price o corn,
but beneted as commodity prices stabilized. Our other
new holding is Cadbury (tkr: CBY). This company, a
leading conectionary producer, is best known or its
Easter-time oering o Cadbury Crme Eggs. In additio
the company has a strong presence in chocolate, gum
and candy brands. Business is growing in markets suc
as India, where some consumers are getting their rst
taste o chocolate.
Near the end o the second quarter, we bought Paych
(tkr: PAYX). We previously owned this company in 200
when interest rates were low and unemployment was
airly high. We believe we are in a similar environmen
now, and have likely hit the bottom or both measure
As interest rates rise and unemployment eases, Paych
will earn higher interest on its customers payroll balanc
and will process more paychecks. The company also h
a history o returning money to shareholders, with a
dividend that now stands at 4.6%.
Our nal major purchase or the quarter was an exchang
traded und (ETF) ocused on the Asia Pacic region
(tkr: GMF). This investment increases our exposure to
non-dollar denominated investments and the growt
markets o Asia.
We completed our sale o GE shares. This is the rst
time in twenty years that many o our portolios have
not held GE. Though we believe that the industrial sid
o the company still oers many excellent products, w
have continued concern regarding GE Finance, which
contributes over 50% o earnings, and will be a drag
on the stock in a market recovery.
The positions we initiated in the rst hal o 2009 are
what we would consider ront shel investments.
Characteristics o these companies include a strong an
protectable share in the core business, no or very low
debt and attractive valuation. These investments, as w
as additions to existing positions in Gilead Sciences (tk
GILD), Varian Medical (tkr: VAR), Adobe Systems (tkr
ADBE), Cisco Systems (CSCO) and Sun Hydraulics Cor
(tkr: SNHY) have lowered our cash allocated to equit
ASSET MANAGEMENT
Is It Sae to Go Back in the Water?
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7/31/2019 2nd Quarter 2009 Commentary
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ent risks on the equity side of ourney short, secure and liquid.
to 12%. We anticipate that our next purchases will be
rom our back shel company list. These companies
have a greater propensity to use debt, and thereore
were hammered in a market retting about defation.
They should rebound as these ears recede. Recent
decisions by technology leaders Microsot and Cisco to
use leverage on their balance sheets refect this change
in thinking, and should boost earnings.
Fixed Income Dilemma:Wheres the Yield?Short-term interest rates remain at historic lows. However,
investors who six months ago were content to trade
yield or saety are now growing impatient. The dilemma
is that rates are low or a reason: xed income marketshave not yet ully recovered rom the recent credit crisis.
Bonds that are perceived as sae and liquid have anemic
returns due to strong demand. In order to pick up higher
yields, investors must be willing to buy debt with longer
maturities or lower credit ratings. We believe that locking
in long-term rates continues to be unwise, given the
growing concern about infation and the weak balance
sheets o many companies and municipalities.
The government lowered interest rates in 2008 to
help stimulate the economy and circumvent a deep,
prolonged recession. The last rate cut by the Federal
Reserve (in December 2008) lowered Fed Fund Rates to
a target o 0-0.25%. In addition, the Fed announced
that it would buy up to $300 billion o Treasury bonds
in an eort to keep borrowing costs or mortgages and
commercial loans down. (Both o these interest rates
are priced o o Treasury rates.) These actions have
generated increased concern about infation, which
would put long-term bond buyers at risk or signicant
losses. Recent price moves in Treasurys demonstrate
how quickly this market can change. I an investor had
purchased a 10-year U.S. Treasury bond on 12/31/2008
yielding 2.2%, the total return on that bond through
6/30/09 would have been -8.7%, as interest rates
increased to 3.5%.
We believe the best options or xed income investmentin this environment include the ollowing:
1. Short CDs (1-3 years): currently the best alternative
to Treasurys. CD yields average about 0.75% higher
than Treasurys, are FDIC-insured or amounts up to
$250,000 (this limit has been extended to December
2014) and have decent liquidity i an investor needs
to sell beore maturity.
2. Investment-grade corporate bonds: credit spreads
or these bonds have tightened as the economic
landscape has improved in recent months. There arestill some opportunities, but with deault rates yet to
peak and yields close to levels obtainable through
CDs, risks and rewards need to be careully weighed.
3. Municipal bonds: yields are attractive, but higher
rates refect the nancial diculties acing many
states. This is especially true or the state o Caliornia,
which has seen borrowing costs increase as legislators
attempt to close a staggering budget gap. We will
be taking a close look at a new type o municipal
bond called the Build America Bond (BAB) which
emerged rom the American Recovery and Reinvest-
ment Act o 2009. These are taxable bonds issued
by state and local municipalities that are partially
subsidized by the ederal government.
Forecasting interest rates is always challenging, but is
especially so right now because o the uncertain down-
stream eects o the stimulus. Our approach today is to
take prudent risks on the equity side o our portolios
and keep xed income money short, secure and liquid.
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FEATURED EQUITY
Varian Medical
Varian is a leading provider o radiation therapy machinesand sotware to treat cancer. The companys products
include linear accelerators (radiotherapy), equipment
that allows neurosurgeons to visualize and operate
in three dimensions using external beam radiation
(stereotactic radiosurgery) and radioactive seeds
that are temporarily implanted in a cancerous tumor
(brachytherapy). The company also designs, manuactures
and sells X-ray machines that use lm and those that
use fat panel digital image detectors or lmless X-ray
systems. In the last several years, Varian has entered the
security screening business, which uses similar technology.
Radiation therapy is used to treat a wide variety o solid
tumors, including cancers o the head and neck, breast,
prostate, pancreas, lung, liver, uterus, ovary, brain and
spinal cord. Varians intensity-modulated radiation therapy
(IMRT) allows the shape, intensity and angle o the beam
rom the linear accelerator to conorm better to the shape
o the tumor, thus decreasing radiation to surrounding,
normal tissue. The companys image-guided radiation
therapy (IGRT) urther renes this process.
Varians RapidArc machine and associated sotwarecontinue to experience strong demand world-wide.
Treatments are aster and more eective or patients
and healthcare centers can treat many more people
per day. The aging population, increased incidence o
smoking in developing countries and unhealthy liestyles
are all driving an increase in the number o cancer cases
around the world. Healthcare authorities project an
increase o 50%, to 15 million cases, by 2020. Many
countries remain woeully under-equipped to treat cancer
with radiotherapy, providing signicant untapped markets
or Varian.
While Varian has experienced some slowdown in orders
during the recession, revenues continue to grow and
300 new orders or RapidArc were booked in 2008.
The company has a solid balance sheet with minimal debt.
We believe Varians technological leadership, strong
management and prudent nancial position will result
in steady growth over the next several years. Recessions
resolve, and as this one does, healthcare organizations
will again be looking to upgrade to the most eective
and ecient ways to treat patients with cancer.
i
n t e g r i t y
Where do you nd integrity?
It emanates rom tradition, endures market cycles, and sustains long-term
partnerships. Trust lies at the heart o what we do, how we serve and whom
we employ.
[in tegr te] n. honesty, sincerity, completeness
PRICE OF U. S. TREASURY BONDS
PriceofBond
12/31/2008 6/30/2009
30 YEAR TREASURY 4.5% 05/15/203810 YEAR TREASURY 4.0% 08/15/2018
12/31/08 1/31/09 2/28/09 3/31/09 4/30/09 5/31/09 6/30/09
140
145
135
130
125
120
115
110
105
100
95
This graph demonstrates the convergence o prices between 10-year and 30-yearbonds over six months, emphasizing the importance o keeping xed-incomeinvestments short-term.
Fixed Income Dilemma: Wheres the Yield? (continued)
7/31/2019 2nd Quarter 2009 Commentary
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Few people have been emotionally unaected by the nancial upheaval o the last year. It has
been unsettling and painul to watch declines in assets. Many investors have taken precipitate
actions, reacting quickly and earully to the decline in stock prices. Few have had the patience
and ortitude to methodically think through the longer-term implications o their actions.
Human beings like to believe that decision-making, whether buying a car, taking a new job orselling a stock, is a rational process. They think that they have careully analyzed the pros and
cons and that the nal decision is unaected by emotion. Individuals are particularly prone to
being overcondent in their investment decisions, which are in act oten rooted in emotional
bias. This is why proessional management has much to oer. The eld o behavioral nance,
developed over the last twenty-ve years, applies basic psychology to nancial decision-making
at both the individual and population levels. It turns out that, even in less tumultuous times,
investors are subject to biases that infuence their decisions, usually or the worse. In the words
o Warren Buett, investing is not a game where the guy with the 160 IQ beats the guy with
the 130 IQOnce you have the ordinary intelligence, what you need is the temperament to
control the urges that get other people into trouble in investing.
For example, research has demonstrated that people are much more concerned about possiblelosses than they are delighted by equivalent gains. Investors consider the loss o a dollar twice as
painul as the pleasure they get rom an identical gain. Thus investors take many more risks to
avoid losing money than they do to realize gains. Classically, people want to raise cash when the
market is alling. Then they ail to get back in and miss a rally. There is also a strong bias toward
recent experience at the expense o looking at long-term trends and statistical odds. Applying
this concept to the stock market numbers o the last several years suggests that most individuals
have been overly pessimistic as the market has gone down, just as they were overly optimistic
that the market would keep going up when it hit 14,000. Some people can be strongly infuenced
by what researchers call touchy-eely syndrome, becoming quite attached to stocks o companies
that they personally know something about or have selected themselves.
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WEALTH MANAGEMENT
The Psychology o Investing
INDEX PERFORMANCE Q209 YTD
Dow Jones Industrials 11.96 -1.97
Standard & Poors 500 15.92 3.19
EAFE (international stocks) 25.57 8.06
Russell 2000 (small stocks) 1.67 1.62
Barclays International 1.67 1.62
Barclays Municipal 2.11 6.43
Index RetuRns
7/31/2019 2nd Quarter 2009 Commentary
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Stay out of the trap of anchoring on historical
inormation, past stock prices or perceptions about
an investment. We set buy and sell targets or equities.
Keep a patient, humble perspective on investing, by
diversiying, tuning out the huge amount o noiseand going or steady outperormance over time. We
avoid market timing and ensure that decisions regarding
raising cash are based on either valuation or asset
allocation needs o clients.
1950 University Avenue, Suite 202
East Palo Alto, CA 94303
tel 650-322-4000
web www.nelsonroberts.com
email [email protected]
Past perormance is not necessarily a guide to uture perormance. There are risks involved in investing,
including possible loss o principal. This inormation i s provided or inormational purposes only and does
not constitute a recommendation or any investment strategy, security or product described herein. Please
contact us or a complete list o portolio holdings.
For additional inormation on the services o Nelson Roberts Investment Advisors, or to receive our
Newsletters via e-mail or be removed rom our mailing list, please contact us at 650-322-4000.
2009 Nelson Roberts Investment Advisors
WEALTH MANAGEMENT
The Psychology o Investing (continued)
Investment Team
Brooks Nelson, CFA
Brian Roberts, CFA, MBA
Steve Philpott, MBA
Dennistoun Brown, MD
Ann Oglesby, MD, MBA
These examples just scratch the surace o the many
biases that infuence investment decision-making. A
disciplined, consistent process and heightened awareness
o these biases allow us, as proessional managers, to
avoid many o these pitalls. Specically, we do the
ollowing:
Use checklists to make sure we answer key questions
about every potential investment.
Question each other vigorously, listen carefully to
contrary viewpoints and look at what i scenarios.
Write down the original investment thesis and refer
back to it as we assess investment perormance over time.
Learn from mistakes and leave them behind. It is
particularly important to remember that we do not
have to make money back the same way we lost it.Not every decision is correct and not every stock is a
winner. We sell when we need to and move on.
Some examples rom research on overconfdence:
19% o people think they belong to the richest 1% o U.S. households
82% o people say they are in the top 30% o sae drivers.
80% o students think they will nish in the top hal o their class.
68% o lawyers in civil cases believe that their side will prevail.
81% o new business owners think their business has at least a
70% chance o success, but only 39% think any business like theirs
would be likely to succeed.