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2012 Q4 Newsletter

I always look forward to writing the last newsletter of the year, regardless of the market's performance. I like to reflect on the all of the political, economic, natural "crises" that the Gloom and Doomers used as justification for fleeing equities under the guise of "It's Different This Time." Long time readers know that I enjoy contrasting this frantically pessimistic, reactive, and short-sighted investment approach with our confidently optimistic, proactive, patient, disciplined, low-cost, globally diversified, life-long approach. Although espousing the many advantages of our investment philosophy always warms my heart, I must admit I get a bit of extra pleasure in years like 2012 when our diversified equity portfolios gained in the neighborhood of 20% despite the Euro-, Election-, Hurricane Sandy-, Fiscal Cliff-, and End Of The World-Crises we endured.

But this year I must give credit where credit is due. As much as I would love to sound the trumpets about how we Optimists triumphed yet again, instead I am offering my thanks to Nick Murray for allowing (actually encouraging) investment advisors to pass along his excellent article entitled: 2012: The Year Pessimism Got Skunked...Again. Nick conveys all of the points I could possibly hope to make brilliantly, and does so using his uniquely eloquent writing style. Please take the time to enjoy...then forward the link to the Pessimists you know.

With the 2012 review of events, the economy, and the market in Nick's capable hands, let us kick off the New Year by renewing our commitment to "What DEM Believes":

What DEM Believes

(1) We build every client relationship on mutual trust, transparency, and honesty.

(2) Before we invest one dime, we must take the time to assess our clients' current situation, identify their goals, and assemble a sensible Plan for achieving them. Doing anything else would be pure speculation.

(3) Investor behavior, not investment performance, ultimately determines financial outcomes. Our job is to modify our clients' behavior in such a way to ensure a successful lifetime investment experience.

(4) The only sane definition of money is purchasing power (i.e. after inflation).

(5) Around the globe over the past few centuries, owning equity in great companies has returned about 10%, lending money via bonds has returned about 5%, and sitting idly in cash has returned about 3%. During this same time, inflation has run about 3%. Do the math.

(6) The risks in owning a beautifully diversified, intelligently managed equity portfolio decline over time. The risks in owning a fixed income portfolio increase over time.

(7) Market timing does not work. Long term returns can only be achieved by patiently enduring short term volatility.

(8) The only certainty is uncertainty, so there will always be something to worry about. Regardless, we will continue to behave rationally amid uncertainty.

(9) It is impossible (and thus foolish) to fund rising expenses with fixed income. Financial independence can only be achieved via a perpetually rising income stream that cannot be out-lived.

(10) Unwavering Optimism is the only view that squares with the historical record.

Here's to a fabulous 2013!

Don Davey
Senior Portfolio Manager
Disciplined Equity Management

2012 Market Index Returns

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