by: Alfred L.

Angelici

Vol. 4.02 February 28, 2010

Investment Philosophy:

“The Defensive Investor (or passive) investor

will place his chief emphasis on the avoidance of
serious mistakes or losses. His second aim will
be freedom from effort, annoyance, and the need
for making frequent decisions.

We shall repeat here without apology - that

the (defensive) investor cannot hope for better
than average results. The defensive investor
must confine himself to the shares of important
companies with a long record of profitable
operations and in strong financial condition - or
by investing in commingled (mutual) funds
utilizing professional administration of his
investment program along standard lines.”

— Benjamin Graham
“The Intelligent Investor”
Market Analysis: Jobs & PIIGS
Despite continuing signs of US economic improvement and
fourth quarter corporate earnings, the market is being held back
by:
♦ Persistent negative US Job growth,
♦ Emerging sovereign debt problems in Portugal, Ireland,
Italy, Greece and Spain (to name the most well-known)
US Jobs:
The situation is improving, but still no consistent positive job
creation yet. Don’t expect to see any sustaining investment
equity growth until the US starts seeing steady Jobs growth.
PIIGS:
Last year it was banks, this year it is countries. As
governments spend billions to prop up their financial banks and
local economies, the stress is beginning to now appear as a
sovereign-debt problem for some (e.g. Greece). The real
question here is: “Is this just a problem of a couple of poorly run
countries? …or is it just the tip of the iceberg and the start of a
nd
“double-dip” into a new 2 Great Depression.
According to “The Economist” magazine, there are three
factors that will determine whether such fear is justified:
(1) The strength of the current recover; is it self-sustaining,
or only propped up by huge government stimulus?
(2) Scale of the sovereign-debt problems; is Greece just a
lone basket-case, or is it just the start of a domino
effect for many more countries
(3) Can the world’s central bankers and Mr. Bernanke
design and co-ordinate the withdrawal of their stimulus
policies so as to engineer an economic “soft-landing”.
(Continued on next page)
2010 Roth IRA Conversion
Did you know that the income ceiling and filing
status requirements for Roth IRA conversions
will be eliminated in 2010? This is great news
for many investors.
While there's no "one size fits all" answer, a
Roth IRA conversion may make sense if:
• You won't need to access the money in the
account within the first 5 years after you
establish the Roth IRA. (Keep in mind that
a longer timeframe is usually necessary for
a conversion to be most effective.)
• You can pay the tax due on the conversion
without having to draw money out of the
original IRA or an employer-qualified plan.
• You're in a lower tax bracket now than the
one you expect to be in when you retire.
• You want to build an estate for your heirs
and minimize the overall family tax burden.
Several opportunities that make a Roth IRA
conversion especially appealing in 2010:
1. You can postpone your tax payment. If
you convert in 2010, you'll be able to spread
taxes over a 2-year period, splitting the
payment equally on your 2011 and 2012
income tax returns. This can make it easier to
pay the tax.
A word of caution: If income tax rates go up in
2011 or 2012, your total tax payment could
actually increase by spreading the taxation
over the two-year period. Talk to your tax
advisor to determine estimated tax payments.
2. The tax on the conversion may be lower
in today's market. If you have investments in
an IRA or other qualified plan that have lost
value, you'll only pay tax on the amount you
convert. This means as the investments
recover, growth will be tax-free (if you meet
certain holding-period requirements) and you
could actually benefit from the market
downturn.
3. Your assets will have more time to grow
tax-free. By taking advantage of this
conversion opportunity as soon as it's
available, which for many investors is in 2010,
you'll have more time to grow your Roth IRA
assets. And with a Roth IRA, your invested
dollars continue to grow tax-free without
required distributions.
(End)
2010 Market Analysis Contd:
In the US, The Fed has (electronically) printed and released
money into the financial markets in excess of $2 Trillion USD.
For the US, the challenge before Mr. Bernanke to smoothly
unwind The Fed’s massive liquidity strategy has been likened to
landing a 747 on an aircraft carrier from 60,000 feet. The chart
above gives the average person a visual sense of the scenario
and the enormity of the risk that lies ahead for the US.
Overall for 2010, I’m still a cautiously optimist and I expect
the global economies to continue to rebound and improve;
especially in Asia. From a US perspective I anticipate the US
dollar to continue to depreciate and global commodities to
continue to reflect this through appreciating values. I further
expect commodity prices to continue to appreciate due to
ongoing strengthening global demand and US currency
devaluation.
So far, the issues above (other than the US Debt issue)
appear to be short-term bumps in the road, and the US Debt
problem is not likely to crush the economy or investors’
positions in the near-term. Significant hikes in State and
Federal tax levels are more likely to a problem before the US
debt is.
Over the next two months I will closely watch this situation
unfold and, if deemed necessary, re-evaluate and change the
investment strategy for the DI Fund to protect the principal.
On page 5 is a layout of a hypothetical fund using the
defensive investor strategy and investing $100,000. Over the
course of the year this fund’s performance will be tracked and
compared against its benchmarks and the major market
indices.
(End)
A Treatise on Probability
By: John Maynard Keynes
Why in the world am I bringing up such a
‘dry’ topic in a newsletter that is meant to be
light and informative? Because I want to teach
you that even as far back as 1920, John Maynard
Keynes understood that ‘inferred probability’
was a very important trait in being able to
successfully predict the likely outcome of
investment and economic decisions made today.
This is what good Macro Economists do.
They read & study current political and
economic events today and then match them up
against related similar historical patterns in order
to predict high probability future outcomes.
Here is what John Maynard Keynes wrote:
“There is a distinction between the part of our
belief that is rational and that part which is not.
The highest degree of rational belief, which is
termed ‘certain’ rational belief, corresponds to
‘knowledge’. Thus knowledge of a proposition
always corresponds to certainty of rational belief
in it and at the same time to actual truth in the
proposition itself. We cannot be said to know a
proposition unless it is in fact true.”
… Now the tricky part…
“A ‘probable degree of rational belief’ in a
proposition, on the other hand, arises out of
knowledge of some corresponding secondary
proposition. (a) A man may rationally believe a
proposition to be probable when it is in fact
false, if the secondary proposition on which he
depends is true and certain; (b) while a man
cannot rationally believe a proposition to be
probable even when it is in fact true, if the
secondary proposition on which he depends is
not true.”
…simply put, a predicted outcome can be said to
be based on probability if related to a secondary
factor that is known to be true. However even if
the predicted outcome occurs, the advanced
assertion cannot be said to be based on
probability if the secondary factor is not true…
“Thus rational belief of whatever degree can
only arise out of knowledge, although that
knowledge may be of a proposition secondary, to
the proposition in which the rational degree of
belief is entertained.”
(Continued on next page)
 A Treatise on Probability contd.
January & February Market See-Saw Summary: Be very wary of how you
formulate your investment decisions; especially
if based on secondary factors. And most Macro
Economic forecasts are simply that. If your
mental models are good, then they are likely
being based on secondary propositions that are
true and can be said to hold some level of
probability for a successful outcome.

However, if your mental models are bad then

your decisions are being based on secondary
factors that are unsound and not true -- and you
are deceiving yourself or just guessing ( hoping
& speculating ) on a successful outcome.

Worse, if by chance you achieve successful

On Building Investment Wealth:
“You don’t have to be brilliant, only a little bit
wiser than the other guy, on average, for a long,
long time.”
– Charlie Munger (Warren Buffett’s partner)
Defensive Investor Fund Performance Result:
Return Comparison Chart
Thru February 28, 2010
outcomes making lucky investment decisions
based on “hunches” or “SWAG’s” there may be
a tendency to delude yourself into thinking you
are an investment genius and that you have been
making sound (high probability) decisions.
Unfortunately it will only be a matter of time
before the odds for bad luck will catch up with
you. (Analogy: This is like tossing a coin and
expecting ‘heads to appear every time.) And
when your luck changes we can only hope you
will not lose most or all of your life savings.
Unfortunately, this is what most investors do.
It is also the reason why for more than 50 years,
Wall Street has advised investors to use Asset
Allocation (diversification) to protect themselves
from such potentially dire mistakes.
(End)

Portfolio Mix
Investment YTD Stocks-Bonds- China Green Energy Growth
Option Return Cash

Fidelity
1.75% 0%-91%-9%
US Bond Index
Vanguard 2015a 0.09% 60%-40%-0%
Wilshire 5000 Index -0.18% 100%-0%-0%
S&P500 Index -0.61% 100%-0%-0%
Fidelity 2020a -0.80% 64%-33%-2%
DOW 30 Index -0.99% 100%-0%-0%
Fidelity 2035 -1.46% 83%-17%-0%
DI 60%-40%a -2.09% 60%-30%-10%

(*) Returns rounded to

nearest 100th of a
percent
 YTD Model Portfolio Results:

DI Model Portfolio: (60% Stocks / 40% Bonds & Cash)

No. Original Target Current Return

60% Stocks Fund Description & Symbol Price
Shares Cost Mix Value %
45% LrgCap Int’l Capital Appreciation (FIVFX) $10.81 1764.000 $20,003.76 20% $19,069.58 -4.67%
China Region Fund (FHKCX) $26.10 359.000 $10,012.51 10% $9,369.71 -6.42%
Select Natural Resources (FNARX) $27.66 175.000 $4,978.75 5% $4,840.34 -2.78%
Fidelity Canada Fund (FICDX) $48.06 206.000 $9,986.88 10% $9,899.99 -0.87%
0% MidCap None 0%
15% SmlCap Int’l Small-Cap Opportunity (FSCOX) $8.29 1749.000 $15,006.42 15% $14,499.20 -3.38%

30% Bonds Inflation-Protected Bond (FINPX) $11.23 893.617 $9,999.32 10% $10,035.32 0.36%
Capital & Income (FAGIX) $8.61 1172.461 $10,007.82 10% $10,094.89 0.87%
Strategic Income Fund (FSICX) $10.83 932.525 $9,999.25 10% $10,099.24 1.00%

10% Cash Cash Reserves MMF (FDRXX) $1.00 10006.291 $10,005.29 10% $10,006.29 0.01%

Return Totals $100,000.00 100% $97,914.57 -2.09%

(A) Investments results based on a hypothetical $100,000 portfolio invested at end of trade day, December 31, 2009.
(B) Your results may differ depending on how closely you follow or differ from either of these models and the exact
date you initially invested in each fund.

YTD Results Discussion:

At the moment the Defensive Investor sample fund is trailing all benchmarks and the general index
funds. The reason for this is due to our heavy exposure to “international funds” (especially China),
and “Natural Resources” fund. Both of these areas have suffered greater than US Domestic funds due
to the following reasons:

<a> Sovereign Debt problems in Europe (“PIIGS”) – especially the problem in Greece.
<b> Concern that China’s liquidity policy is fueling a possible “Property Bubble”.

It currently appears that the threats to global economic growth are mounting in the short-term. I
shall leave the Defensive Investor sample fund as it is for the next two months and watch to see if more
substantial evidence materializes to provide more insights into the future. My original outlook for 2010
anticipated was for a steady continued recovery, but perhaps the recovery will be impacted by a few
big bumps in the road or will emerge much more slowly than first anticipated.

“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time
and still retain the ability to function. One should, for example, be able to see that things appear
hopeless and yet be determined to make them otherwise."

- F. Scott Fitzgerald
2005 YTD Fund Returns for Core and Other Recommended Funds
(December 31, 2009)

Stocks:
Large Cap
International Capital Appreciation (FIVPX)
China Region Fund (FHKCX)
Select Natural Resources (FNARX)
Fidelity Canada Fund (FICDX)
… “International Capital Appreciation” is our CORE Large Cap international growth investment. In general,
international funds continue to outperform US (domestic) funds since 2004; especially due to the run-away
printing and spending of the U.S. currency. With The Fed’s extreme preference for excessive “liquidity”,
international continues to outperform.

...”China Region Fund” is an international investment holding what is arguably the biggest growth region in the
world today. China’s GDP growth rate averaged ~ 8% in 2009. And while the fund returns here were significant
in 2009 (~ 64%), I believe we can expect above average market returns again for here 2010.

...”Select Natural Resources” is purely a commodities hedge for the DI portfolio. A hedge against significant
increases in oil, gas, paper, precious metals (e.g. gold & silver), industrial metals (e.g. copper, iron), etc.

...”Fidelity Canada Fund” is another hedge investment in both currency and commodities and offers nearly all the
benefits of investing in South American / Latin America without the political risks. This is protection from a
depreciating U.S. dollar decrease, and global commodity price increases.

Mid-Cap
None Selected for the 2010 DI portfolio.

Small Cap
International Small-Cap Opportunity (FSCOX)
... "International Small Cap Opportunity" fund is the CORE small cap investment for the model portfolio. The
fund provides a currency hedge against a declining U.S. dollar and exposure to emerging young companies in
major world markets.

Bonds:
Inflation-Protected Bond (FINPX)
Capital & Income (FAGIX)
Strategic Income Fund (FSICX)
...”Inflation-Protected bond” fund is a CORE investment holding that offers a hedge against inflation should it
raise its ugly head again in the near-term. Inflation-indexed bonds provide balance and safety in a rising interest
rate environment.

…”Capital & Income” fund is an investment that is meant to take advantage of an improving global economy. For
as the economy improves it should also improve the credit worthiness of the companies owing these “junk
bonds”. Any marked improvement in the debtor company’s ability to pay on its loans should improve their value.
High yield bonds tend to act more like stocks than bonds; at least until their credit ratings return to “commercial”
grade.

..."Strategic Income Fund" is an investment in a broadly-diversified bond fund with an expectation for above
average returns based on its spectrum of global investments and credit ratings.

Cash / Money Market

Cash Reserves MMF (FDRXX)

...Why invest in a Money Market Fund (MMF)?

Answer: for flexibility to invest quickly in existing or new, compelling opportunity areas without having to move
out of any existing positions to do so.

Detailed Economic and Global Outlook as of May 2005...

Positive Highlights:
o US GDP up +5.9% in the 4th quarter of 2009
o US Unemployment rate dropped from 10.2% to 9.7%
o Leading US Economic Indicators continue to improve
o Job losses still negative (-20,000 for January 2010), but improved over December 2009

Risks & Concerns:

o Crude oil breaks $80.00/bbl
o Gold prices at $1,122.00/oz
o Terrorism increases
o Weekly Unemployment Benefits filing increase 36,000 in last week of February
o Dollar predicted to be heading for greater declines value
o Petro-politics a significant global issue in today’s world
o Possible China liquidity policy induced Property Bubble?
o Portugal, Ireland, Italy Greece and Spain at risk of sovereign debt default risk?
o Without new Federal stimulus funding Unemployment benefits start ending Feb 28, 2010
o The Fed’s liquidity gambit faces slims odds for engineering a “soft-landing” to untangle the strategy
o Iran, world’s largest terror group supporter, continues to defy United Nations cease-and-desist
order for 3 years now, and quickly approaching ability to possess nuclear weapons

Happy Investing!

“ Charlie Munger and I believe that according the name 'investors' to

institutions that trade actively is like calling someone who repeatedly
engages in one-night stands a 'romantic.' ”

- Warren Buffett