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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

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Post Election Valuations & The Lost Decade

November 11th, 2008

Before we get to any financial discussions, we would like to take the time to thank all of our Veterans for their service to our great nation. Without their sacrifice and service, we would not have the great lives we have.

Separately, we know we are a bit biased, but we think we have pretty sharp clients. And we are quite sure that our clients are very knowledgeable of the current economic situation. Despite this, when you see it in black and white on your brokerage statement, it can often have the affect of a punch in the nose.

This past week our clients received their statements through the end of October. This has caused several to contact us to ask “what do we do now--is it time to run for the hills?”

We have fielded many questions regarding the election. No matter what you thought of the election, remember that the President is just one person. Also remember that although there is now Democratic control of Congress, they do not have a super majority. In our opinion, this is good as it will force both sides of the political spectrum to work together (maybe somewhere along the way they will remember that their job is to represent America—and not their special interest friends).

Although the election dominated the headlines, our concern remains focused on valuing investments.

Since World War II the average recession has lasted about 11 months. Two of them have lasted 16 months. We think we entered the current recession in the fourth quarter of 2007. Our best guess estimate is that we will be in a recession for up to another year. What does this mean for investments? Actually, this is a bit of good news.

The stock market is a Leading Indicator and on average the stock market starts to recover when we are about 60% of the way through a recession. If our estimates are correct, we think that the market has bottomed and will begin to regain its footing in the next few months.

Another point of optimism is that, based upon fundamental valuation characteristics, the market as a whole is now as cheap as it has been in almost 25 years. These quantitative (as opposed to emotional) characteristics evaluated 28 items such as price to earnings, price to cash flow, price to book value etc. The simplest, and most widely recognized indicates that the market as a whole is only trading at 12 times earnings.

Looking back over the past 55 years the 12 price to earnings ratio puts us in the 15th percentile, obviously well into the bottom quartile. The bottom quartile is where markets very often bottom out. At these levels we are truly in “bargain territory”. From here, on a one year basis (going all the way back to 1926), the market has been up about 18%, on average, in the next year.

It is often difficult for many investors to continue hanging in there when it seems that everyday brings a new form of Chinese Water Torture. In fact, we are very close to a “lost decade” in which the broad stock markets experienced little or no gain for a ten year period. This is quite unusual.

During the 20th century there were only two periods in which rolling 10 year annual total returns fell below the returns we have just had over the past 10 years. One of these time frames began with the Great Depression and the other was in the decade that ended with the recession of the mid-70’s.

A breakdown of these Bear Markets and the subsequent 10 year returns is listed below:


Subsequent Rolling 10 Yr

Subsequent Rolling 10 Yr

The Bear Market

Annual Total Returns

The Bear Market

Annual Total Returns

Year   Return

Years        Returns

Year   Return

Years     Returns

1930 -24.9%
1931 -43.3%
1932 -8.2%















1933-1942

9.35%

1934-1943

7.17%

1935-1944

9.28%

1936-1945

8.43%

1937-1946

4.41%

1938-1947

9.62%

1939-1948

7.26%

1940-1949

9.17%

1941-1950

13.38%

1942-1951

17.28%

1973
-14.6%

1974
-26.5%
































1975-1984 14.76%
1976-1985 14.33%
1977-1986 13.82%
1978-1987 15.26%
1979-1988 16.33%
1980-1989 17.55%
1981-1990 13.93%
1982-1991 17.59%
1983-1992 16.19%
1984-1993 14.94%

Obviously, you can see that markets don’t stay down forever. Furthermore, after incredibly difficult periods the market often experiences extended positive periods.

It is also worth reiterating what we have always said: the value of any business is its earnings. The long term average value of all companies is historically about 14 times earnings. If all we do is get back to average we will experience a 20% gain from where we are today.

As such, our advice to our clients remains the same: only invest in the stock market if we can remain committed to those assets for long periods of time. We continue to look for, and find, attractively valued businesses that should enhance our client’s long term net worth’s. Therefore, we are staying invested and will not crater to the emotional hype or spin of the news media which repeatedly (but falsely) tells us that the world is coming to its end.

Finally, Wealth Manager Magazine has compiled its 2008 list of Top Wealth Managers and for the fourth year in a row Sather Financial has been named to this list. While our national ranking improved, we are now ranked in the top ten independent wealth managers in the state of Texas. Although we are pleased with this distinction we would gladly trade the award if it meant better times for our clients.

Going forward, we want to assure you that Sather Financial is doing everything in its power to give our clients all possible advantages regarding their financial management. We are reviewing all of our processes and strengthening our research and administrative staff at a time when others are cutting back.

Despite these efforts, we always know there is room for improvement. As such, if you think there are things we need to be doing better, or differently, please share your thoughts. You will not hurt our feelings and we appreciate your feedback.

Our clients have been patient and loyal to us and we need to make sure we are upholding our end of the commitment also. Please call to discuss this or anything else.

Sincerely yours,

Dave Sather, President                                           Warren Udd
CERTIFIED FINANCIAL PLANNER™                   CERTIFIED FINANCIAL PLANNER™

Last Updated on Thursday, 05 February 2009 14:58