Letter from Cobleskill

By Tom Putnam

It’s clear that a lot of things have changed this past year including life’s circumstances, the macroeconomic picture, and the stock market. Nonetheless, through it all, some things are essentially the same. I believe it’s one’s outlook, expectations, and convictions that determine one’s level of satisfaction.

I have lived most of my life amid the stunning scenery and wonderful people of Schoharie County. Known as the “Breadbasket of the American Revolution” because farmers provided wheat and hops for Washington’s troops, the Schoharie Valley, like many parts of our nation this year, suffered devastating effects from a natural disaster. Hurricane Irene hit this valley hard destroying homes and livelihoods. Looking at the wake of the deluge, it’s apparent that reconstruction will be a lengthy process. The fertile farmland in the valley is warm and durable – its people as well. Over time they will rebuild and reap harvests once again.

The macroeconomic headlines have been similarly unnerving, including the: federal government’s gamesmanship with the debt ceiling and deficit spending, downgrade of America’s credit rating, European fiscal and sovereign debt concerns, ongoing struggles in the housing market, doggedly high unemployment, and snail-like economic growth. Since the financial crisis, we have communicated our anticipation of a slow-growing U.S. economy for the foreseeable future. This viewpoint stands. And although the recovery has been erratic and not as fast as many had hoped, we continue to see gradual improvement in various economic data – especially on the company level.

Corporate earnings, which ultimately drive stock prices, continue to be healthy and the balance sheets of numerous businesses are strong. As several global economies continue to outpace growth in America, U.S. companies are taking advantage of these offshore opportunities and many of the holdings in FAM Funds are expanding their international sales. They are also increasing their domestic market share as heavily indebted competitors in their industries struggle to survive. Additionally, industries such as retail, automotive, and manufacturing are doing much better than they were just a few years ago.

The volatility of the stock market in recent months has disillusioned some investors as well and shaken their confidence. Obviously the American government has a debt level that cannot be sustained and although the downgrade of its credit rating has likely contributed to short-term stock market fluctuations, it has put a spotlight on the issue that could help resolve the situation. Various other factors have also contributed to market volatility and while it may be difficult to endure, our time-tested investment approach has shown us that times of insecurity often create long-term opportunities.

These volatile declines caused several of our holdings to fall to our calculated buy prices and we added shares to the Funds as appropriate. We were also able to invest in quality corporations that are new to the Funds, at bargain prices. We patiently wait for opportunities to invest in staunch companies that have attractive valuations, strong U.S. market share, and are well-positioned to take advantage of international growth. We believe this replenishment of the Funds will be a positive in the next three to five years, but even more so over a longer-term horizon of five to 10 years.

The dichotomy between corporate America doing well and the government and people struggling persists. It would be imprudent for investors to ignore big-picture issues such as excessive government debt and the high unemployment rate. However, a preponderance of evidence proves the futility in trying to time a decline, remove capital and return when “things are better.” The fact is we live in an uncertain world, one in which there are real and perceived threats. Given the constancy of uncertainty, we believe the best approach to preserving and growing your wealth over the long term is to invest in a portfolio of solid companies with great management teams that have global sales and strong cash flows.

Fenimore Asset Management, the investment advisor to FAM Funds, has successfully navigated numerous challenging times over the past four decades. Our investment philosophy remains steadfast and we invest in profitable, prudently-financed, and well-managed enterprises. Our relatively unique, regular company visits are at the heart of our risk-conscious research and investment process. It is this company-level, grass-roots research that gives us conviction about investing in a business – especially during downturns.

Realistically, we continue to expect a slow-growth U.S. economy and are cautiously optimistic. Natural disasters, the financial crisis, and stock market volatility can happen in a flash; it takes much longer to renew and move forward in an enduring fashion. We encourage you to share our long-term outlook. We are still bullish about stocks for this decade and believe that they are the best-positioned asset class to outpace inflation and generate wealth over the long haul.

If you have any questions, please call one of our in-house FAM Shareholder Services representatives at 800-932-3271. Thank you for your ongoing trust.

Please see Fenimore disclosure.