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| January 9, 2006 |
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| Dear Client,
We had a disappointing year; our results were utterly ordinary in that they were right between the total return of the Dow Jones Industrial Average and the Standard and Poor’s 500 Index. Worse yet, they did not come close to besting our true benchmark, which is to exceed the commonly used inflation indicators by at least four to six percent. We have said many times that we think these government produced measurements understate your true inflation rate, and we still have that in the back of our minds. However, in this environment, if we best inflation by 5 percent going forward, it is likely to mean we have about doubled average real return, and that is a mouthful. Brief excuses are more palatable then lengthy ones, and we can make ours in a sentence. In the previous five years we had outperformed the S&P Index by about 7% per annum, and that may just be better than we in fact are. In reverting to the mean, the inevitable broke out. There is a subtle corollary point to be made here, even if it is throwing a hostage to fortune. Mediocrity can be tolerated in an occasional year so long as it has a plus sign attached to it. It can never be tolerated with a minus sign attached. Losses destroy the compounding process, with big ones infinitely more serious than small ones. The best part of our year can be summed up in a briefer moment than our excuses. By the time you read this letter, Jim Lebenthal and Jane Paik will be stockholders in Levy, Harkins & Company, making them partners in law as well as by habit. This has quite an emotional content for us, in that we have never had other partners in all 26 years of our existence. We hope it holds real meaning for you too, because it means we intend to go on and on, and on, and on. Some years ago one might have described our style as “old school”. We are value investors for a limited number of self-selecting families and entities that want the manager to have a large and near identical financial interest as their own. We use virtually no leverage, because we don’t want to live with the variability leverage is likely to give us. We write frequently but bluntly, because we would like the same if our positions were reversed, but also because we haven’t the time to field phone calls from each client every quarter explaining ourselves. If we are blunt enough, you may not like what we are doing but at least you will know without doubt what our reasons are. We would continue to call this “old school”, except that school has been out for ages. Wall Street today is about starting new products weekly and touting successes quarterly, rather like surrounding a field with goal posts and proclaiming anything that goes through anywhere a “gooooooooal!” Few people prosper from this attitude, hardly any of them clients. Though only 37, Jim Lebenthal is a throwback. He did not need to be cautioned against seamy morality on Wall Street by us when we met him 10 years ago. His grandparent’s business had been treating bond investors fairly for 70 years before that, and the apple hadn’t fallen any distance from the tree. Jim understands that we cannot guarantee investment performance; in that we can only strive to do our best. Indeed, he likes to say, “When we buy something, we can make sure that it is selling at less than its intrinsic value. But our buy point doesn’t release the horses from the gate. That time will come when it will come.” Pretty good synopsis of value investing, isn’t it? We haven’t had the heart to tell him if he tried that line out on most every mutual fund management, he’d be looking for work. And why should we, when it is just what we want in a next generation. Jim understands that performance can never be guaranteed, but fair dealing can always be. That is why we repeatedly say fair dealing is the first thing you buy in a money management fee. It is also why we are so censorious every time there’s another scandal. Everybody in the investment business makes a good living, which makes cheating even more egregious. The other part of the fee that can be guaranteed is accurate reporting, and the diligent care of your existing investments. Here Jane Paik puts us in mind of Lincoln, who purportedly said of his Civil War strategy, “Let us hope that God is on our side, but I must have Kentucky.” Jane is Kentucky to Levy Harkins. In the nine years she has worked here, no one has missed a dividend or interest payment from anywhere, even for a day, that she hasn’t caught and corrected it. Tax reports, status reports, today’s trade reports, never cause Jane a sweat. We can be in Los Angeles and Sag Harbor on the same day, and never think twice about it, so good is communication now. If Jane is on the other side of the George Washington Bridge, we start getting nervous. Lucky thing our partnership interests don’t reflect that fact. We want to close this letter by telling you we feel fine. This isn’t a maudlin tribute to others and then we disappear. We are hoping it is not even half-time yet. Since so many of you have the lion’s share of your assets with us, however, we thought we should tell you we have been looking ahead, and we are confident we see a fun and profitable future that will be a lot like our past. They say the Achilles’ heel of the investment business is that the assets go down the elevator every night. In selling shares to Jim Lebenthal and Jane Paik, we are now sure two great ones will come back every morning. We recently gave a speech at the McColl School of Business for the benefit of the students and despite their professors and have enclosed a copy of it with this letter. It might prove of interest to you. Wishing you and yours a Happy New Year we are, Sincerely, Edwin A. Levy Michael J. Harkins *Read the full speech here* ___________________________________________________________________________________________________ Levy Harkins Rates of Return Since Inception 1980 Rates are Compounded Rates of Return After Fees 2005……………………………………….……………+4.0% Last 10 Years…………………………….…………….+16.0% Since Inception 1980………………………………….+14.6% NOTE: The figures above represent the composite performance of all fully discretionary, balanced accounts. These figures exclude accounts managed for less than 6 months, accounts using short selling and accounts consisting only of fixed income investments, to more accurately reflect the past performance of fully discretionary, balanced accounts. These numbers are after all fees. However, past performance is no guarantee of future results. |