Letter from Cobleskill

By Tom Putnam

Green Shoots

“Green shoots,” signs of rebirth and growth in the spring season, was used as an informal term in the early 1990s to indicate signs of economic recovery in the United Kingdom. An American economist articulated the phrase in February 2009 and then the Federal Reserve Chairman, Ben Bernanke, popularized the expression on March 15, 2009 – a few days after the S&P 500’s recession low – when he observed nascent signs of economic improvement. Although there may have been times over the past three years when it appeared that those shoots did not take root, the economic data are convincing that the recovery, though slow, is real.

Focusing on the headlines can be disheartening. Certainly, we have some challenges: federal government deficit spending, European fiscal and sovereign debt concerns, and the lagging recovery in the housing and job markets. Nevertheless, we continue to see gradual improvement in various economic figures. Corporate profitability is at an all-time high, our unemployment rate is declining, the manufacturing base is becoming more competitive globally, bank balance sheets have been substantially repaired and credit is becoming more available and affordable, and personal balance sheets are improving with more confident consumers spurring sales of autos and other goods.

While we remain ever mindful of the macroeconomic data, it is at the company level where we spend most of our effort. Last year, many of the businesses we are invested in reported strong earnings growth and prospects for more to come. Several FAM Funds holdings are taking advantage of international growth trends while increasing their U.S. market share as heavily indebted competitors grapple to endure. Strong corporations are increasing profitability despite the current environment.

Price Is Separate and Distinct From Value

Corporate earnings ultimately drive stock prices. In fact, many S&P 500 companies had record 2011 earnings. You might ask, “With some of the best earnings in history, why didn’t the S&P 500 Index do better last year?” It was an extremely volatile year for the S&P and most of the fluctuations had little to do with the underlying economic value of the businesses that comprise the index. More often than not, it was the unsettling macroeconomic headlines that caused the indiscriminate selling of stocks regardless of how well businesses were performing.

How you handle short-term volatility is a function of your temperament and perspective. If you are patient and know the value of what you are invested in (or want to invest in), then downside volatility presents opportunity. We used the severe decline in stock prices last August and September to invest in high-quality companies whose stocks were selling at what we considered to be discounted prices. Some were existing holdings and others new ideas. We believe we improved the overall quality of stocks in the Funds and are well-positioned for the long term.

Our approach is to analyze the intrinsic value of the business which becomes our benchmark for determining whether the stock price is low or high. One of the most important tenets of value investing is that price is separate and distinct from value. A focus on the economic value of individual companies and our long-term orientation keep us even-keeled in turbulent markets.

FAM Funds

FAM’s long-term investment philosophy helps us focus on three- to 10-year horizons — and beyond. Just as the economy has shown improvement, the stock market has followed suit since it hit bottom on March 9, 2009. Over the last three years, we have been working as hard as ever actively managing the portfolios. While our process and philosophy remain steadfast, we have been exploring new investment ideas in various industries. Some of these newer stocks have made a positive contribution to the Funds.

We also had some exciting news:

1. 2012 marked the FAM Value Fund’s 25th Anniversary! Please contact us if you would like a free copy of our anniversary brochure, “25 Stock Investment Guidelines.” It is a collection of wisdom from investing through multiple Bull and Bear markets.

2. The FAM Equity-Income Fund celebrated 15 years in 2011. The Wall Street Transcript, SmartMoney, and Louis Rukeyser’s Wall Street highlighted the Fund.

3. On March 1, 2012 we launched the FAM Small Cap Fund. Our new Fund focuses on small companies with long-term potential.

We have a comprehensive offering of mutual funds to help you achieve your long-term financial goals. Though each fund differs in strategy, they share the same investment philosophy and approach that have been FAM’s hallmark. With the overall stock market trading at 20-year low valuations, we think portfolios of high-quality stocks can produce good results.

Although the mood of some investors may be tepid, rest assured that things are improving across multiple economic areas and have been for the last three years. Yes, we have had impediments, but this is to be expected as we work through American and global economic issues. Stocks have rallied and continue to show promise, especially those of first-rate companies. Also, we believe that there is still potential for equities from current valuation levels and the next three years may result in even further improvements.

If you have any questions about our Funds or want the Value Fund’s 25th Anniversary brochure, please call one of our in-house FAM Shareholder Services representatives at 800-932-3271. Thank you for your enduring trust.

Please see Fenimore disclosure.