The Courage to Be An Investor

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The Courage to Be An Investor

• Tal Daley
• Senior Vice President, Director
• Legg Mason Funds Marketing

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INVESTOR A person who expends for future
benefits or advantages.
SPECULATOR A person who engages in a business
deal where a good profit may be made at
considerable risk.
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EXTREME Located at one end or the other of a
range or series. EXPECTATION   The act or state
of expectingto consider reasonable, due or
necessary.
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Rev 2000 Annual Median Returns
Past performance is no guarantee of future
results. YTD is as of 12/31/04 Source FactSet
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From ISI 11/26/03
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There is always a disposition in people's minds
to think that existing conditions will be
permanent. When the market is down and dull, it
is hard to make people believe that this is a
prelude to a period of activity and advance. When
prices are up and the country is prosperous, it
is always said that while preceding booms have
not lasted, there are circumstances connected
with this one which makes it unlike its
predecessors and give assurance of permanency.
The one fact pertaining to all conditions is that
they will change. -Charles Dow
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Profits Jobs

• The worst crime against working people is a
  company that fails to operate at a profit.
•   Samuel Gompers
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• An economy where jobs are looking for peopleas
  well as people looking for jobsis one of the
  best social programs we have.
•   Larry Summers
• Former Secretary of the Treasury
• January 2000

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Economy
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Unemployment Rate
Source Bureau of Labor Statistics
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Initial Jobless Claims
Source Bloomberg, Bureau of Labor Statistics
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ISM Purchasing Managers Index
The ISM PMI has been above 60 for nine
consecutive months. The only other time that such
a string of above 60 readings occurred was
between July 1983 and February 1984.
Source Bloomberg
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Source Bureau of Labor Statistics
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Outsourcing Index
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The War Over Global Imbalances
The Europeans suggest that our trade deficit and
our budget deficit create imbalances in the world
economy.
Source Thomson Financial, May 2004
In November, 2002 the FED suggested to European
financial leaders that the imbalance was due to
the gap between U.S. and European/Japanese growth
rates and return on investment, which clearly
favors the U.S.
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Source U.S. Department of Treasury
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Estimates
Source Standard Poors Past performance is no
guarantee of future results. These estimates are
based on Tals analysis and are not indicative of
the future performance of the market or any
security.
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Federal Deficits 10-Year Interest Rates
Source Legg Mason
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1950s 1960s
Source Federal Reserve
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ISI Group, August 2004
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ISI Group, August 2004
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The War on Terror

• Criminal problem with international institutions
  resolving?
• Long delayed war that will take as long as the
  Cold War to win?
• Replacement of the 1648 Peace of Westphalia
  organizational concept?
• Dean vs. Kerry vs. Bush (anti-war, war with
  alliances, war with U.S. as the lead)
• The end goal--democratization of the Middle East?
• Where do the European's stand, really?
• How will this affect my investments?

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WAR CHARTS
Average annual return 4.89 (not including
dividends)   Source Thomson Advisor, 2004
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Average annual return 14.73 (including
dividends)   Source Thomson Advisor, 2004
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Average annual return 6.46 (including
dividends)   Source Thomson Advisor, 2004
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A Strong Economy Produces a Strong Defense
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A billion seconds ago it was 1959. A billion
minutes ago Jesus was alive. A billion hours ago
our ancestors were living in the Stone Age. A
billion dollars ago was only 8 hours and 20
minutes, at the rate Washington spends it.
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Government vs. Market

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A nickel ain't worth a dime anymore. -Yogi
Berra
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Economic Growth, The Price Level and Inflation

• Major economic transformations Agricultural to
  industrial to information economy
• 1865 to 1915 Agricultural to industrialeconomic
  growth of 500, price level falls 50
• The farmer in 1865 and the farmer in 1915
• Parallel universes productivity/scarcity vs.
  traditional inflation
• Inflation Always and everywhere a monetary
  event (late 1960's, 1970's)
• We are currently at the front end of a major
  economic transformation that drives global
  economic growth
• The electric iron, Jeff Bezos, Day One and the
  Milton Berle Moment
• Where is the monitor?

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THE TEMPLETON MARKET PROGRESSION PESSIMISM SKEPTI
CISM OPTIMISM EUPHORIA
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SP 500 Composite Total Return
Source Weisenberger This illustration includes
an initial investment of 10,000. Past
performance does no guarantee future results.
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When To Buy
Source Weisenberger This illustration includes
an initial investment of 10,000. Past
performance does not guarantee future results.
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Four Portfolio Choices

• Invest a hypothetical 100,000 on 12/31/94 in
• A portfolio consisting of 75 SP 500 and 25
  NASDAQ 100, rebalancing at the end of 1999 to
  bring the portfolio to its original allocations.
• A portfolio consisting of 75 SP 500 and 25
  NASDAQ 100 without rebalancing
• A diversified portfolio consisting of 35 SP
  500, 15 SP Mid-Cap, 10 SP 600 Small-Cap, 20
  MSCI EAFE, 10 Lehman Govt/Credit Int., 10
  Lehman Govt/Credit, rebalancing at the end of
  1999 to bring the portfolio to its original
  allocations.
• A diversified portfolio consisting of 35 SP
  500, 15 SP Mid-Cap, 10 SP 600 Small-Cap, 20
  MSCI EAFE, 10 Lehman Govt/Credit Int., 10
  Lehman Govt/Credit without rebalancing.

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Index Definitions

• SP 500 An index of common stock prices and is
  generally considered representative of the U.S.
  stock market.
• NASDAQ 100 - an index based on the largest and
  most active non-financial domestic and
  international issues listed on the Nasdaq Stock
  Exchange based on market capitalization.
• Lehman Intermediate Government/Credit - an index
  based on all publicly issued intermediate
  government and corporate debt securities with
  average maturity of 4-5 years.
• SP 400 Mid-Cap - a market-weighted index that
  represents approximately 10 of the aggregate
  market value of U.S. domestic companies.
• MSCI EAFE - an unmanaged index based on share
  prices of approximately 1,470 companies listed on
  stock exchanges around the world. 20 countries
  are included in the portfolio.
• Lehman Government/Credit a market
  value-weighted index that tracks the daily price,
  coupon, and total return performance of
  fixed-rate, publicly placed, dollar-denominated
  obligations.
• SP 600 Small-Cap a market capitalization-weight
  ed index that tracks the daily stock total return
  performance of an investable universe of domestic
  small-capitalization stocks.
• Investors should be aware that indexes are
  unmanaged
• and one cannot invest directly in any index.

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Summary
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Core Four Growth
The purchase and sale of securities should be
made on an individual basis, considering the risk
and investment objectives of each investor.
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Core Four Asset Allocation
The purchase and sale of securities should be
made on an individual basis, considering the risk
and investment objectives of each investor.
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In theory there is no difference between theory
and practice. In practice there is. -Yogi Berra
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Bill Miller and Warren Buffett
Certainty belongs to mathematics, not to
markets, and anyone who awaits clarity,
visibility, or the diminution of uncertainty pays
a high price for a chimera. -Bill Miller, Value
Trust 12/31/02 Shareholder Report There is
nothing dumber than betting against
America. -Warren Buffett, Wall Street Journal
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Major Themes

• Major economic transformation to IT underway
• Low inflationary environment driven by FED
  credibility
• Falling price level bias from productivity
• We are in a "hot" Cold War era that will last
  decades
• Most of the civilized world understands the
  stakes
• Capital surplus and excess rates of growth,
  return on investment noticed by the world
• Domestic economy should grow 4 this year, 3.5
  for the next several years
• Market valuation fair returns will be driven by
  earnings and cash flow growth

These estimates are based on Tals analysis and
are not indicative of the future performance of
the market or any security.
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