SPENCE Asset Management

Resolutions January 2009

As January is upon us and we all adjust to writing “2009,” many take the turning of the calendar as an opportunity to set new goals or to recommit to the old ones. Lose 20 pounds, be a better parent, read more, get organized…we hope for the best with our own personal resolutions and wish you the same with yours.

Professionally, it is also a perfect time to set new goals, to recommit to the old ones and to figure out what we learned in 2008. In 2008, the markets saw unprecedented dislocation. Large banks, large insurers, mortgage giants and many other industries suffered irreparable damage. The full effects of the credit crunch have likely not been yet felt by Wall Street nor by Main Street. Here is what we learned and in some cases relearned:

Lesson #1: Political uncertainty is usually unfavorable for the markets. For many months in 2008, the outcome of the elections was up in the air as was the legislative future of America.

Lesson #2: If it looks to good to be true, it probably is. For many house flippers and real estate investors, large appreciation in price proved unsustainable.

Lesson #3: Risks to individual business models must be closely examined; also stress tests must take into account ALL risks coming to fruition simultaneously.

Lesson #4: Invest in what you understand. Investors were burned by derivatives and other complex financial instruments of which the underlying investments were unclear.

Lesson #5: Understanding who a company is doing business with is just as important as how a company is doing business.

Lesson #6: Dramatically rising energy costs impair the consumer.

Lesson #7: When it comes to over use of leverage, the music will eventually stop and being caught without a chair will be painful.

Armed with this experience, we look to 2009 and beyond with resolve. The companies in which we take ownership will:

1. Generate cash flow. This can be in the form of cash for the management team of a company to reinvest on behalf of stockholders, or cash in the form of dividend or interest payments that we can use for the things we need, or for our own reinvestment.
2. In our opinion, have a superior competitive position.
3. Profit from and are linked to the following crucial industries:
   • Health Care — People tend to spend money on health concerns in most environments.
   • Food — People tend to spend money on nutrition in most environments.
   • Shelter — People tend to spend money to protect themselves from the elements.
   • Education — People tend to spend money to educate themselves and their children.
   • Energy — People tend to spend money to move about from place to place and stay warm in the winter and cool in the summer.
   • Government — People consistently rely on government and trust them with resources.
   • Information — People involved in health care, food production and distribution, shelter, education, energy, and managing government require information aggregation and information organization to do their jobs.

And we will continue to be committed to the following ongoing resolutions:

1. We will continue to educate ourselves and glean insight from the greatest investment minds.
2. We will remain disciplined and very strict in selecting new candidates for investment.
3. We will keep history and its many lessons in the forefront of our minds.

Case in point: it was the second term for the president, Wall Street scandals damaged the confidence of the markets badly, and boiling conflicts overseas stoked the fires of global instability. No, we are not speaking of 2008, we are speaking of 1937. Seventy-two years ago America had arrived at a point when the financial markets appeared to have shaken off the terrible plunge in national confidence that occurred earlier in the decade. Then in March of 1937 stock prices went into a sickening decline that did not end until April of 1938. When the dust settled the Dow Jones Industrial Average had sunk more than 49 percent and confidence in the private sector as well as the ability of both the President and Congress had reached an all-time low. In the years ahead, and despite fresh predictions of absolute catastrophe, America actually survived and prospered.

The last half of 2008 was the most trying period of our careers. But we seize this opportunity to reflect on the lessons learned in 2008 as well as to refocus on our goals for 2009. We appreciate your continued patience and offer our best wishes to you and your family for a safe, healthy, happy, and prosperous 2009.

—Jim Spence, Registered Principal, Spence Asset Management

The information contained herein is for informational purposes only without regard to any particular user’s investment objectives, risk tolerances or financial situation and does not constitute investment advice, nor should it be considered a solicitation or offering to investors. To determine if investment in a Separately Managed Account with Spence Asset Management is an appropriate investment for you please call 1.800.230.1840.

Investment Advisory Services are offered through Spence Asset Management, a federally registered Investment Advisor. Investment Advisory Services offered through IAR’s of Spence Asset Management, a Registered Investment Advisor to all residents of the United States.

The views expressed here are those of Spence Asset Management and are subject to change with market conditions. The information contained in this newsletter is derived from sources believed to be accurate. You should discuss any legal, tax, or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes investment advice or a solicitation for the purchase or sale of any security. Market forecasts cannot be guaranteed. Past performance does not guarantee future results.