Northstar Asset Management, Inc. - Socially Responsible Investing

Our Outlook at Northstar Asset Management, Inc. (Q3 2008)

Each time I approached writing this quarter's letter, I hoped there would be a positive end in sight, or at least a respite from all the panic and turmoil. It seems difficult right now to find any kind of a healthy perspective, so I have taken it upon myself to create a perspective of my own, which I hope you will adopt during these difficult times in the financial markets.

It is only money. When I think about crises in general, I tend to think about war, natural disasters, loss of life, limb or health. What's happening now is a crisis that was man-made (like war), and is solvable. Markets go up and down, our income needs go up and down, our spending goes up and down, and our assets go up and down. Sometimes we control the volatility of our assets (how much we spend) and sometimes we don't (the market gyrations).

This is not the depression, or the beginning of one. Regardless of the fluctuations in our portfolios each day, we are still able to come home to our houses and families, afford medical care, take out the trash knowing that someone will pick it up and take it away. As socially conscious investors we know that this is NOT the case for a growing percentage of the population in the U.S. and in other developed nations, and that many, many people around the world live in abject poverty. As members of the top 1% of people with wealth in this country, let us continue to have a healthy perspective on how well off we are, even with our asset values fluctuating.

Frankly, we do live in a country that rewards people for ingenuity. The structure of our capitalist culture is a double edged sword, breeding both greed and creativity. Right now we are watching the effects of that greed run wild. But this structure can also provide innovation, solutions, and opportunity. The damage has been done, with repercussions yet to be felt, and now the most creative and the best minds will need to dig us out.

We are on the precipice of tremendous change in this country, and I fully believe that we are on the way up. It is vital that during this time we keep an eye on asset allocation and spending. Tremendous spending of your assets at this time is the same as "selling at a low." Careful attention to your household budget and great communication with us about your changing cash flow needs will lessen the short term impact of fluctuating portfolio values. If we have enough cash put aside to meet your financial needs for the next few years (and we believe that we do), and you stick to your budget, the actual impact of all of these market fluctuations will mean much less to you over the long run.

The value of having a moral compass in exercising leadership cannot be underestimated. Be it adherence to an investment process or to a personal belief system, the value of a principled discipline is best demonstrated in times of stress. We have seen how the absence of a moral center, lack of a coherent structure and erratic responses from the Bush administration and its cohorts have created confusion and exacerbated uncertainty and panic across global markets. Now is the time for calm. Submission to the politics of fear is a self fulfilling prophecy and we prefer to think of the glass as half full.

We may be "activist investors" but we are, always have been, and will continue to be cautious stewards of your money. We have individually-targeted asset allocations for each of our clients; we review these targets quarterly and trade your accounts to meet your guidelines. We pay close attention to your capital gains. We have a diversified group of stocks (company size, industry group and country of origin), carefully chosen fixed-income investments, and federally-insured money funds in our portfolios. We cannot protect you from all downturns in the market, but we can see you safely through them.

Financial Update

In preparing to write this letter, I sat down and re-read the quarterly letters I sent to you after the first and second quarters of this year. It's a little eerie to see how some of the things I wrote about have come around...

From our first quarter client letter:

"[When Bear Stearns went down,] the Fed went on to create a $30 billion asset pool for overnight lending, specifically to aid financial institutions in distress without alerting the masses about internal cash flow issues...Now, the creation of a $30 billion loan fund does have a positive affect on the general public indirectly by keeping credit markets functioning, as does the Bear Stearns buyout: it prevents market hysteria, and this is a good thing. But it does absolutely nothing to fix the root of the problem, and also does nothing to provide immediately-needed aid to the hundreds of thousands of families who are on the verge of losing their homes due to the sub-prime mortgage crisis."

From our second quarter client letter:

"For us, this has been the quarter of protecting assets...We have been carefully taking profits where they exist, trimming one stock, contributing to another to rebalance equities, and doing some long, hard thinking about bonds and money market instruments...In light of potential increasing risks to money market funds and cash, NorthStar Asset Management, Inc. has purchased safer short-term treasuries in lieu of money market securities for clients whose money market deposits exceeded $100,000 or so. At this time, we believe that foregoing a slightly higher return to cash equivalents is justified to ensure capital preservation of your cash equivalents accounts. We believe we are being overly cautious here, but we believe that that is better than the alternative."

Finally, in our first quarter client letter we wrote this:

"Hopefully broad-based oversight and tighter regulation of the greedy will bring into balance not only our concern for the well-being of all, but a rebirth of our country as one with values that are respected, not despised, around the globe."

So, what happened to tighter regulation and broad-based oversight?

Well, let's look at who's running the show, here. You've got Hank Paulson, the former head of Goldman Sachs who, along with other investment bankers, convinced the federal government to loosen regulation on reserve requirements so that they could continue to grow and leverage their assets to an even greater degree, and you've got Ben Bernanke, expert on The Great Depression, whose continual response to our current economic difficulties is to draw parallels to that time. One helped create the problem, the other has created the ensuing panic, and now both are trying to solve it with the creation of this enormous bailout package.

While it is true that foreclosures abound in certain areas of the country, at this time the people in "distress" that you are hearing from the most are the executives and long-term employees of very large investment banking firms, commercial banks and mortgage companies. These are the guys who created, sold and invested in all the convoluted mortgage and debt products that have lost market share. For them, this downturn in financial companies really is a personal financial crisis, and they are freaking out. Unfortunately, this single minded perspective on the crisis is shared by the co-creators of the bailout package. Their lack of perspective on the problem (and therefore on the solution) and their sense of urgency and panic combine with their whip-lash inconsistency, which has reverberated throughout the debt markets -- followed then by the equity markets and markets all around the globe.

Had this panic posturing been omitted, we believe that the real impact on the investments in your portfolio would have been much, much less. We believe this is a crisis of confidence, not a reenactment of The Great Depression. And so, we are going to keep doing what we do. We will monitor and adjust your diversified group of stocks as necessary, continue to carefully choose fixed income investments that meet our criteria of safety and income, and keep enough insured money funds in your portfolio to weather any storm.

Our Stake in Solving the Problem: Shareholder Advocacy

The disastrous effects of predatory lending are not news to us at NorthStar. For nearly a decade, we have warned that abusive lending practices - besides being unethical - are not fiscally sustainable. Unlike the conservatives who are now placing the blame on the sub-prime borrowers themselves, we believe that the problem stems from the companies who target disadvantaged populations to improve their own bottom lines. Starting back in 2000, we fought Household International's predatory lending practices. We engaged Citigroup on this issue, and we continue to advocate for changes in Wells Fargo's lending practices. Back in April of this year, I attended Wells Fargo's annual shareholder meeting and addressed the gathering with these words:

"Our interest as shareholders in raising these issues is simply that predatory lending is bad business. Sub-prime, predatory lending practices bump up corporate profits in the short term, but are driven by shortsighted, extraordinary greed on the part of financial institutions. We believe that using the American dream of home ownership to boost profits at the expense of the citizens of this country is egregious, and is the cause of the current financial collapse of this country."

We will continue our activism in this area, and will keep you updated on our actions and progress. While we persist in using our time-tested tactics to keep our clients' assets safe, we do not neglect our responsibilities as socially responsible investors.

-Julie Goodridge