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Real Answers from Russell B. Dow
Dow Investment Group
Senior Portfolio Manager
President & Managing Director

(Note: This article is submitted by Elizabeth Hamilton-Guarino of Dow Investment Group for Russ Dow.)

So, I was getting my hair done the other day and was in a room with around 12 women and the topic of the stock market came up. A lady asked the group, “So just what is the Dow Jones Industrial Average anyway?” Then this other lady added, “I turn on the news and everyone is in this panic or uproar on a daily basis, so I just shut the TV off and let my husband deal with our investments and finances.” Then another woman in the room asked, "What is a stock?"

Now, in my head, the word “Yikes” resonated, but I have been in the financial world for 15 years, so I calmly and politely said, in general terms, “The Dow Jones Industrial Average is a stock price index of 30 significant or prominent stocks and it is a very common indicator of trends of prices of stocks and bonds in the United States.” The discussion continued.

Seriously, her question really got me thinking about how women really should know the basics about finances and appear not to. When I am in a room with women and the topic of investing comes up, it is like the topic of sports has come up--I noticed everyone nodding and pretending like they know what they are talking about, but in reality, most don't and most are afraid to ask.

So with the help of Michael Dow of Dow Investment Group, we put together some general concepts to know about investing for women or really any investor for that matter.

Our first thought is that women are no different than men when it comes to investing or knowledge of investing. It is important to know what is going on with your finances and investments. According to Michael Dow, “I had a lady visit me at the office last week. Her husband has been dead for a year now and she wondered why their investments took a nose dive. She had trusted him all the years they were married and had not paid any attention to what they were invested in. When she brought in her portfolio, we discovered her husband had invested in “high-yield” mutual funds, which were invested in “junk bonds” – bonds of companies that are more likely to go bankrupt. She had thought he had invested more conservatively and didn’t bother to look into the finances too deeply upon his death.”

At Dow, we always strongly recommend that our clients invest in high quality stocks and bonds. Michael Dow said, “You can’t buy fire insurance after the fire.” Meaning, if you buy lower quality stocks and bonds, you take a greater risk of losing your investment. But let's go back to the basics for a moment and just cover some of the basic types of investments. In very general terms, a stock is an indication of ownership of a company. A bond is a company promising to pay back principal and interest to you over a period of time in exchange for the investment. A mutual fund combines the money of its investors and invests those funds in a wide variety of stocks, bonds and/or money-markets.

We also recommend that each person take advantage of having an IRA. There are two five kinds of IRAs, a traditional and a Roth IRA. In the case of being married, EACH person should contribute to their own IRA each year. "Dow says, "We see many cases in reviewing investments where a married couple has put all their money into the husband's accounts, but an IRA was never funded for the wife. This is a common mistake." Please visit www.ira.com for more information.

More than anything, however, it is important to become educated about investing. For example, At Dow, we offer a basic investing course for anyone to take. It is on the web at http://www.dows.com/classes.htm.

"Investing is about applying good common sense and learning as much as you can."

October 2008

Dear Investor:

Not all stocks go down in a bear market.¹

When the world's stock markets head south we typically experience what is known as a “flight to quality” or a “flight to safety.” Such a “flight to quality” in the United States usually manifests itself by the sale of foreign securities and the purchase of domestic securities, by the sale of stocks and the purchase of bonds, and by the sale of low quality stocks and the purchase of high quality stocks. Not surprisingly, then, one common denominator of those stocks that go down the least, or may actually go up, in a bear market appears to be their above-average quality.

Probably the most common and most logical way to measure the quality of a common stock is by the strength of the underlying company's balance sheet and the health of its income statement. We consider a common stock's Standard & Poor's “Quality” ranking as a useful proxy for the strength of its balance sheet and its Value Line “Timeliness” ranking as a useful proxy for the health of its income statement.

On the reverse side of this page we list some of our current favorites from among these financially strong companies and show how they have performed since the onset of the current bear market on October 9, 2007.²

Though we always encourage investors to own high quality securities, we believe this emphasis on high quality may be as important now as at any other time since the Great Depression of the 1930s. If you have any questions about the quality of the securities you own, whether you own them directly, or indirectly via mutual funds or variable annuities, we invite you, at no cost or obligation, to let us examine them for you.

We hope that you will give us a call.

Very sincerely,
Clifford Dow
Clifford G. Dow, Sr., CFA, ChFC, CFP®
Chartered Financial Analyst
Chartered Financial Consultant
Certified Financial Planner™ DW2/DWB0076

Company	Industry	S&P³	VL⁴	10/9/2007⁵	9/26/2008	% Change
Abbott Laboratories	Pharmaceutical/Hospital Supplies	A-	2	$ 53.54	$ 59.40	+11%
Apache	Petroleum	A	2	91.63	109.88	+20%
Avon Products	Cosmetics/Personal Care Products	A	2	36.83	41.68	+13%
Bard (C. R.)	Medical Supplies	A-	2	87.42	98.60	+13%
Burlington Northern	Railroad	A-	2	85.28	98.34	+15%
Carbo Ceramics	Oilfield Services/Equipment	A-	2	49.99	52.68	+5%
Church & Dwight	Household Products (Baking Soda)	A	2	46.84	61.23	+31%
Devon Energy	Natural Gas	A-	2	85.53	98.76	+15%
Donaldson	Air/Liquid Filtration Equipment	A+	2	41.98	43.39	+3%
Ecolab	Cleaning/Sanitation Products/Svs	A	2	46.42	49.70	+7%
Estee Lauder	Skin Care/Cosmetics	A-	2	42.86	50.88	+19%
Fastenal	Builders' Supplies Store Chain	A	1	48.26	50.38	+4%
General Mills	Food Processing	A-	2	57.17	69.61	+22%
Hudson City Bancorp	Thrift	A	1	15.56	18.81	+21%
IBM	Computers & Peripherals	A	1	116.50	119.42	+3%
Johnson & Johnson	Medical Products/Pharmaceuticals	A+	2	64.53	69.40	+8%
Mathews International	Memorialization Products	A+	2	45.86	50.14	+9%
McCormick	Food Processing	A+	2	35.03	38.87	+11%
McDonalds	Restaurant Chain - Fast Food	A-	2	54.84	63.20	+15%
MDU Resources Group	Energy & Natural Resources	A	1	27.81	28.69	+3%
Nike	Footwear/Athletic & Apparel	A+	2	60.89	67.79	+11%
Occidental Petroleum	Petroleum (Integrated)	A-	2	65.93	77.33	+17%
Owens & Minor	Medical Supplies	A	2	39.20	49.23	+26%
Ross Stores	Family Clothing Stores	A+	1	26.80	36.90	+38%
Sigma Aldrich	Chemicals - Specialty & Research	A+	2	49.71	54.70	+10%
Strayer Education	Educational Services	A	1	172.01	206.98	+20%
TJX Companies	Retail: Off-Price Family Apparel	A+	2	29.28	31.96	+9%
Union Pacific	Railroad	A	1	58.28	73.27	+26%
Wal-Mart Stores	Discount Department Store Chain	A+	1	44.43	60.71	+37%
Watsco	Retail Building Supply	A-	2	42.73	52.10	+22%

	Average:					+15%

	Dow Jones Industrial Average			14,165	11,143	-21%
	Standard & Poor's 500 Composite			1,565	1,213	-22%

¹ A bear market is typically defined as a decline of 20% or more from a previous high. The all-time closing highs of both the Dow Jones Industrials and the S&P 500 were made on October 9, 2007. Their subsequent closing lows to date were made on September 17, 2008, at 25% and 26% below their previous highs, respectively. By this traditional definition, we cannot know if we are out of the recent bear market and into the next bull market until the market has risen and closed up 20% from its previous low.
² Past performance, of course, is not necessarily indicative of future performance. It also should be understood that many other stocks which met these same criteria did not deliver positive returns over this period.
³ Standard & Poor's ranks common stocks for quality using a scale of A+, A, A-, B+, B, B-, C, D, where the first three ranks are considered high-quality. The rank indicated here is as of 9/26/08.
⁴ Value Line ranks common stocks for “Timeliness” using a scale of 1 through 5 where 1s and 2s are considered above average. The rank indicated here is as of 9/26/08.
⁵ Closing prices adjusted for dividends and splits.

September 2008

The Question: How can you avoid an irrecoverable portfolio loss … at any age?

The Real Answer: Successful lifetime investing requires the avoidance of irrecoverable losses. That is a seemingly obvious statement. However, it is an often overlooked reality. Unfortunately, what sometimes passes for “conventional wisdom” holds that young people can “afford” to take substantial investment risks because they have the “luxury of time” to recoup potential (and even likely) losses associated with aggressive investments.

Reality could not be further from the truth. The luxury of youth is the potential benefit of compounding returns. That time advantage is often overlooked and easily squandered. An irrecoverable financial loss incurred at a young age deprives the investor from many decades of cumulative growth.

To put some numbers to the thoughts: Adjusting for inflation, $100,000 prudently invested in the hands of a 30-year-old might be worth $1.5 million (in today's dollars) by age 65. So, if he speculate and loses the $100,000, that would be $1.5 million less that he would have after he stops working. In other words, losing $100,000 at age 30 can be said to be equivalent to a 65-year-old's losing $1.5 million. The latter circumstance would be clearly devastating; the former should be considered no less so.

Some might claim that the 30-year-old still has 35 years to accumulate his retirement savings. On the other hand, many people fail to save adequately. The early loss might only give the youngster 35 years to contemplate the compromise that he has made.

A young person should invest with no less prudence than should his retired parents.

August 2008

Question: What is happening with the stock market in general and the economy right now?

The Real Answer: Sometimes medicines can have terrible side effects.

We have a sick economy. The government is aggressively administering an elixir. The patient appears likely to recover. Unfortunately, there could be some painful reactions to the cure.

THE SICKNESS
The sickness is the current "credit crunch" - viewed by many to be one of the worst financial crises since the Great Depression. Most simplistically, reeling from having made bad loans during the boom years of the real estate market, banks today often will not lend even to creditworthy borrowers. If banks will not lend, borrowers cannot buy, and sellers cannot sell. Our credit-dependent economy risks seizing up, ultimately putting Americans out of work.

THE REMEDY
What is the elixir? Cash. Lots of it. The government's solution is to provide lenders with easy access to money. If lenders have plenty of money to lend, the wheels of our economy are greased, businesses prosper, and jobs are preserved.

THE SIDE EFFECT
So, what's the problem? The problem is how the government gets the money that it provides to lenders.

The government has three sources of cash:

(1) It can raise taxes,
(2) It can borrow, or
(3) It can print new money.

With the economy on the verge of a recession, raising taxes is not an especially appealing idea - economically or politically. Borrowing is troublesome too. But printing money can seem to be a politically painless way of funding the economy's desperate thirst for cash.

This third option has been an important source of funds in the war against the credit crisis.

So, again, what's the problem?

The problem is that printing money too liberally ultimately fuels inflation. Inflation is a tax that we all pay in time, every time we drink a glass of milk or buy new shoes.

The remarkable thing about inflation is that it is stealthy. It barely makes the news. If the stock market falls 200 points, the news media loudly reminds us that that market "plunged," "crashed" …. or pick your own favorite emotive word. Inflation, however, quietly eats away at investors' portfolios, a little every hour of every day, 365 days a year. But, after a while, that constant nibbling turns into a real problem.

Investors who are unprepared for inflation could find that, after a few years, they have suffered badly. If we are going to be successful investors, inflation is a factor that we must confront.

How we might do so I will leave for the next installment.

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