WEEKLY COMMENTARY, SEPTEMBER 8, 2003

The Markets
Investors returned from the Labor Day holiday in a cheery mood as they bid up stocks in the S&P 500 index for the eighth week in a row.

Not even a weak non-farm payroll jobs report could derail the markets. Last Friday, the Labor Department reported payrolls dropped by 93,000 in August which was the seventh consecutive monthly decline. Yet despite the payroll drop, the economy is solidly growing. Second quarter Gross Domestic Product (a measure of the economy’s total output of goods and services) grew at a respectable 3.1% annual rate and is projected to grow by at least 5% in the third quarter according to the Wall Street Journal.

Normally, this kind of robust economic growth would spur companies to start hiring. But not this time—at least not yet. Companies are able to grow without adding extra staff because worker productivity is growing faster than the economy. In the second quarter, worker productivity grew at an astounding annual rate of 6.8% which is more than twice the rate of the economy. Large technology investments in the late 1990’s, coupled with leaner staffs who are working harder than ever are contributing to the productivity spurt.

This productivity surge can’t last forever though and at some point, we do expect the economy to grow faster than productivity. When it does, we should see employment start to grow again and that will be a welcome relief.

ONE BIG WINNING STOCK CAN MAKE UP FOR A LOT OF LOSERS but your odds of picking that winning stock are small unless it’s part of a portfolio. According to Larry Swedroe of Buckingham Asset Management as quoted in TheStreet.com, from 1957, when the S&P 500 was created, to 1998, only 74 of the original 500 stocks in the index remained. The rest were either merged out of existence or went bankrupt. Here’s the interesting statistic. Of these remaining 74 stocks, only 12 beat the return of the index. Swedroe went on to say that in the decade of the 1990’s, the S&P 500 returned an average of 15% per year yet more than 1 out of every 5 stocks had a negative return for the decade.

Contrast that with a big winner like Microsoft which rose nearly 10,000% during the 1990’s. One big winner like Microsoft can offset a lot of losers. But realistically, the best way to find the next Microsoft is to own a portfolio of stocks rather than just concentrating in a handful of stocks and hoping you’ve latched on to the next hot one.

Owning a portfolio of stocks may not get you on the cover of Money Magazine but it is one of the best ways to help you reach your goals.

THE RIGHT TIME TO INVEST IS . . . when you can. The market has risen significantly the past few months and if you have extra cash on hand, you may be wondering if it’s too late to participate. Although market returns vary from year to year, a recent study suggested that making your investment is more important than the timing of your investment. In the hypothetical study developed by Franklin/Templeton Investments, two individuals invested in the stock market, as represented by the S&P 500 Index, in the worst- and the best-possible scenarios. Both scenarios assumed the two individuals invested $10,000 a year for the 20-year period ending 12/31/02. One invested on the worst day (the day the market was at its yearly high), while the other invested on the best day (the day the market was at its yearly low).

At the end of 20 years, the best-day scenario had an average annual total return of 8.89%. The worst-day scenario had an average annual total return of 7.28%. The difference between investing in the best scenario versus investing in the worst scenario was only 1.61% each year during the 20-year period.

While past performance is no guarantee of future results, this small difference between “good” timing and “bad” timing illustrates the importance of simply being invested.

Weekly Focus — “Beam Me Up Scotty”
Tech stocks have dropped dramatically over the past few years but that hasn’t stopped technology companies from innovating. As if from the pages of science fiction, scientists are on the verge of creating a commercially viable form of data storage using holograms according to a report in The Economist magazine. Currently, data is stored in two dimensions but using a hologram, data could be stored in three dimensions, thus allowing the storage and retrieval of information to be much more efficient.

Scientists estimate holographic techniques will allow a CD-sized disk to store 50 times more data than a present-day DVD. In addition, the data on these new disks could be retrieved at least 60 times faster than current DVDs.

How does this new technology work? It gets very technical but essentially, two beams of light are projected at each other and create an interference pattern which is captured by the photosensitive molecules of a storage medium. The result is a hologram which can be “read” by shooting a third beam through it.

This new holographic technology is another example of mankind’s seemingly limitless ability to innovate. As long as the innovation continues, new companies will sprout and new investment opportunities will arise. And with a little luck, our portfolios might contain one of these companies that may grow up to be a big, long-term winner.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price weighted index of 30 of the largest, most widely held stocks traded on the New York Stock Exchange. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Dow Jones World (Ex. U.S.) is an unmanaged group of securities considered to be representative of the non-U.S. stock market in general. Past performance is no guarantee of future results. You cannot invest directly in an index.

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