by: Alfred L.

Angelici

Vol. 4.0 January 1, 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”
2010 Market Analysis:
After receiving multiple inquiries about restarting this
newsletter, I have realized that there is indeed a demand for
investment information that is unbiased by marketplace. fades
This newsletter was and is meant to teach people how to
invest wisely and defensively and to be able to intelligently
create a plan that will help the reader evaluate and obtain
his/her financial retirement goals.
In this newsletter, I create and track the performance of a
“hypothetical” Fund-of-Funds portfolio from available Fidelity
retail mutual funds with the goal of outperforming comparably
weighted Fidelity and Vanguard (timeline) fund-of-funds retail
products. I also display the standard market Index results as a
secondary guide for the reader to appraise their overall annual
results.
NOTE: In this Defensive investment style, I do not seek to best
the major market indices, though during particular economic
situations that is a realistic possibility.
The reason for this strategy is plain to see, for a Defensive
Investor seeks only to generate a “fair” return while keeping risk
at a minimum. The Defensive Investor measures risk as “loss
of invested money”; not (price) volatility as Wall Street views
risk.
The Defensive Investor seeks at all times to avoid buying
into over-priced, over-hyped regions of the global marketplace.
Unlike lemmings, s/he does not follow the crowd over the cliff to
financial destruction. The Defensive Investor is a “contrarian”.
The second component of this method is to utilize a “tactical
asset allocation” strategy. This simply means that each year
the Defensive Investor scans the macroeconomic environment
to assess what the market may hold for the coming year, and
then formulates an asset allocation plan to capture the greatest
value.
The environment provides sufficient information through
everyday news and government reports available in the
newspaper, TV, and Internet to allow her/him to make educated
estimates of the overall direction of the US & global economies
for the next 12 months (barring unforeseen wars, and "Black
Swan" calamities).
That in a nutshell is this methodology and is all I'm trying to
share / teach you so you can avoid the pain of market crashes
like the one just experienced in October 2008.
(Continued on next page)
Alternative Retirement Plan:
In a past publication I attempted to inspire
you to understand that while building wealth is
important, knowing what to do with after it is
built is even more important. Else, why build
it? The main idea here was to have you see
there is an alternative to spending your wealth
away in retirement.
What most people do during their life-time is
save a little and spends most of what they
earn during their working years. They only
amass a limited retirement nest egg which
they then need to spend down in order to
meet daily financial needs during their
retirement years.
I argue here today that there is indeed a
better way. What is this alternative? Namely
to amass a “Financial Engine” that will be big
enough for you to put work to earn you a
perpetual income in your retirement years.
Today most of you, like me, work to earn
money instead of having money work for us.
So how does on calculate how much one
must amass during one’s working life to
provide a perpetual living wage?
Answer: if we want to earn $100,000/yr in
perpetuity we require a financial engine of
$2,000,000 earning a minimum of 5%
annually. (Derived from formula below…)
Desired Annual Income = SAVINGS
Rate of Return (3% -5%) base required
So now the question is: How much does
one have to save monthly, and for how long,
to build a $2,000,000 financial engine? The
answer to this is found by simply using a
“Future Value” formula calculator.
For a $2,000,000 financial engine, it would
require saving about $1,380 per month and
earning 8% annually for 30 years. I fully
realize this is likely beyond the means of most
Americans but the concept is still true, simple,
and powerful. Lesson: Save as much as you
can, as long as you can. As I’ve never heard
any retiree complain that s/he had too much
money! Also take note that Time is the
biggest key to success in building wealth.
(End)

2010 Market Analysis Contd:
Now, looking ahead at 2010 we see the following: new
unemployment continues to decrease; the global stock market
had wonderful 2009 returns; Christmas sales indicate the
consumers are willing to spend again; inflation is still under
control; Asian economies are on the rebound, China is
experiencing 8% GDP growth, the U.S. dollar is depreciating
due to excessive expansion (printing) of the money supply, and
gold and oil/gas has doubled in the past year.
With the S&P500 up nearly 25% YTD, what areas of the
market should the defensive investor focus on in 2010 to
minimize his/her risk while maximizing the return potential?
Overall and 2010, I expect the global economies to continue
to expand especially in Asia. And from the U.S. perspective I
anticipate the U.S. 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 strengthening global demand and politics.
In light of increased global risks (Note: the easy money was
taken off the table and 2009) I will set this year’s portfolio asset
allocation to 60% stocks and 40% bonds and cash. I will hedge
to fund against U.S. currency loss by investing in international
funds held primarily in foreign currencies. I will further hedge
the fund against significant commodity increases by holding in
minority positions (weighting) a couple commodity-based funds.
On the next page 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)
U.S. Unemployment Chart
Risk & Volatility (Reprint)
By: tchotki – Marketocracy 100 member; forum posting
Why is risk management critical? First let’s
define risk as being exposed to uncertainty of
meeting a goal. This permits risk a slightly
broader definition than failure to meet a goal.
Imagine you had a friend whose father died
five months and two weeks ago. His father was
very wealthy and the estate owes significant
taxes. Taxes are due in two weeks. The estate is
cash poor and a planned sale of a nearby home
recently fell through. The home is appraised at
$100,000 and you happen to have knowledge of
construction methods and you know the
replacement cost is also about $100,000. He tells
you he is dropping the price to $80,000 just to
raise the needed cash.
You offer him cash on the spot. It is July 1,
2001 and you and he walk down to the attorney's
office and close on the property the same day.
One block away, an identical house build at
the exact same time also has a "For Sale" sign
out and closes for $100,000 on the same day.
One block in the other direction is another
identical house, also built at the same time also
with a "For Sale," sign out front. The owner
raises the price to $110,000 to have a good
negotiating position and plans on selling for
$100,000. The first person to see it is so
enthralled; he doesn’t bother to have it appraised,
and hands over the $110,000 and settles on it the
same day.
All three parties have a goal of not losing
money (property value). For convenience sake,
no one borrowed money, as this would leverage
the transactions.
Six months later, Mylan Pharmaceuticals
announces a plan to open a new plant in town
and demand for property is high. Investors are
moving into town in droves. On January 1,
2002, each party has their home appraised. The
homes now appraise for $125,000.
One year later, Mylan cancels its plans and has
laid-off 5,000 local workers and transferred
another 5,000 to New Hampshire. On July 1,
2003, the parties have their properties appraised
again, and prices have collapsed. The homes
appraise for $90,000.
Who took more risk?
(Continued on Next Page)

“To me, it’s obvious that the winner has to be very
selective. It’s been obvious to me since very early
in life. I don’t know why it’s not obvious to very
many other people.”
– Charlie Munger (Warren Buffett’s partner)
Charlie Munger’s 10 Rules for Investment Success:
1) Measure Risk
All investment evaluations should begin by
measuring risk, especially reputational risk
2) Be Independent
Only in fairy tales are emperors told they're naked
3) Prepare Ahead
The only way to win is to work, work, work, and
hope to have a few insights
4) Have Intellectual Humility
Acknowledging what you don't know is the dawning
of wisdom
5) Analyze Rigorously
Use effective checklists to minimize errors and
omissions
6) Allocate Assets Wisely
Proper allocation of capital is an investor's No. 1 job
7) Have Patience
Resist the natural human bias to act
8) Be Decisive
When proper circumstances present themselves,
act with decisiveness and conviction
9) Be Ready for Change
Accept complexity that cannot be removed
10) Stay Focused
Keep it simple and remember what you set out to do
Risk & Volatility contd.
The $80k buyer had three available price
points ($80, $125, $90). This was the most
volatile asset.
The $100k buyer had the same points except
for her starting value ($100, $125, $90). This
was the midrange variance.
The $110k buyer had the least variance ($110,
$125, $90).
“Risk” Evaluation Summary:
If your risk measure is volatility (standard
deviation), then the $110k buyer had the least
risk as housing prices varied the least (+/-) from
his original purchase price.
If your risk measure was asset value -- the
likelihood of making the highest profit -- then
the $80k buyer took the least risk. That buyer
exposed the smallest amount of money for a
given amount of value. (It is important to think
of this as a binomial distribution; namely -- there
are but two choices for an asset: it meets goals
{makes money}, or it does not meet goals.)
I would like to point out that if you define
risk in terms of uncertainty rather than chance
of loss of value, or volatility, then the $80k and
$110k investors took less risk than the $100k
investor who bought the house at the risk-neutral
price.
Overall, the $80k real estate investor had the
highest degree of certainty of ACHIEVING
goals than the person who paid for the asset at
the appraised (risk neutral) price of $100k or the
person who paid the premium price of $110k.
The $110k investor had the highest degree of
certainty OF NOT REACHING his goals, due to
the premium paid compared to either the
investor at the appraised (risk-neutral) value of
$100K, or the person who paid the discount
price of $80k. (End)
-----------------------------------------------------------
NOTE: Warren Buffett has always focused his
investments, arguing that while diversification
may reduce volatility, it doesn't necessarily
reduce risk. In fact, one modern day complaint
cited against mutual funds is that they are over
diversified. As shown above, a deliberate or
inadvertent goal focused firstly on reducing
volatility and only secondarily on increasing
value, can actually lead to increased risk and/or
reduced return potential!
 YTD Model Portfolio Results:

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

Original No. Original Target Current Return

60% Stocks Fund Description & Symbol
Price Shares Cost Mix Value %
26% LrgCap Int’l Capital Appreciation (FECAX) $11.34 1764 $20,003.76 20%
China Region Fund (FHKCX) $27.89 537 $10,012.51 10%
Select Natural Resources (FNARX) $28.45 175 $4,978.75 5%
Fidelity Canada Fund (FICDX) $48.48 206 $9,986.88 10%
0% MidCap None 0%
11% SmlCap Int’l Small-Cap Opportunity (FSCOX) $8.58 1749 $15,006.42 15%

30% Bonds Inflation-Protected Bond (FINPX) $11.21 892 $9.999.32 10%

Capital & Income (FAGIX) $8.62 1161 $10,007.82 10%
Strategic Income Fund (FSICX) $10.81 925 $9,999.25 10%

10% Cash Cash Reserves MMF (FDRXX) $1.00 10005.29 $10,005.29 10%

Return Totals $100,000.00 100%

(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.

“Take your life into your own hands, and what happens? A terrible thing: no one to blame.”

- Erica Jong
2005 YTD Fund Returns for Core and Other Recommended Funds
(December 31, 2009)

Stocks:
Large Cap
International Capital Appreciation (FECAX)
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:
US GDP for the third quarter was
US Unemployment at 10.2%
Leading US Economic Indicators continue to improve
Job losses slowing significantly (but still negative)
Resurgence in the advancement and research into alternative and green energy sources

Risks & Concerns:

Crude oil moves back to $75.00/bbl
Gold prices at $1,095.90/oz
Dollar headed for greater declines value
Petro-politics a significant global issue in today’s world
Terrorism increases as oil regimes get flush on oil sales
Iran, world’s largest terror group supporter, continues to defy United Nations IAEA cease-and-
desist order for 3 years now, and quickly approaches ability to possess nuclear weapons

Summary:

As Defensive Investors, it is always important to err on the side of caution and maintain a low risk
exposure to potential and real economic and financial threats. I believe that while the current, global economic
outlook for 2010 is positive, there exist clear signals to remain vigilant & prudent in order to protect in one’s
hard gained wealth.

Happy Investing!

“The underlying principles of sound investment should not alter from

decade to decade, but the application of these principles must be adapted to
significant changes in the financial mechanisms and climate (of the day).”

- Benjamin Graham