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Sometimes It’s Better to Swim Alone

September 24, 2007
Phil Nussbaum

As many of you are aware, we have a passion for evaluating risk/reward tradeoffs. Virtually every financial decision is about measuring risk versus reward. One of the general truisms of investing is that commodities are rarely very good risk/rewards. To quote Warren Buffet, “it is harder to be smarter than your dumbest competitor in a commodity market.” Put another way, the most opportune risk/rewards are frequently found off the beaten path. But just because an opportunity is off the beaten path does not necessarily mean it is a good risk/reward.

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To “Know” or not to “Know”

August 23, 2007
Kurt Fritz

I’m not a Greek scholar. In fact, I have never taken a course in Greek and I bombed out of a Spanish class in college. Yet, this weekend I was struck by a very interesting talk involving two Greek words – Oida and Ginosko. Both of these words mean roughly – “to know”. When one says they have seen something or have a basic understanding of how to do something that is Oida. Ginosko means to have a deep internal knowledge of something or someone, knowledge gained through hands‐on participation or interaction. In your heart and soul it actually becomes part of you. So what’s the connection to bonds you may be saying? I’m getting to that right now…you Oida??

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Market Alert: A Time to be Greedy?

August 17, 2007
The Disciplined Investor®

A Warren Buffett quote that we used in the past is, “Be fearful when others are greedy and greedy when others are fearful.” At the time we were fearful, as we saw the market as too greedy, observing spreads in both the interest rate risk and credit risk arenas that seemed very tight, with some at all‐time lows. At the same time, we were bemoaning the fact that there was no market volatility and hence not a lot of great opportunity.

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The July 2004 ‐ 2007 Three‐Year Look‐Back®

August 14, 2007
The Disciplined Investor®

Our chief objective is to partner with you along the Path of Great Performance. We view great performance as a relative matter of peer out performance. Two clear ways we follow this path is by investing in the right sectors and combinations thereof, and also by avoiding poor sectors via divestment or by steering clear of poor risk/rewards as investments.

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Radian Rating Update

August 1, 2007
Robert P. Livingston

As the ramifications of the subprime mortgage meltdown continue to bubble to the surface, it is becoming apparent that no market is immune from the damage. That was evident yesterday in the municipal bond market as Radian Asset Assurance Inc.’s insurer financial strength rating was placed on “rating watchnegative” by Fitch Ratings. As part of this rating watch, Fitch also placed ratings watch-negative on the 934 municipal bond deals that Radian insures. The Fitch ratings watch was directly related to the announcement by Radian that they were writing off all of their investment in Credit-Based Asset Servicing and Securitization LLC(C-Bass). C-Bass, a joint venture between MGIC Investment Corp. and Radian, is an issuer, servicer, and investor in subprime mortgages.

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FAS 159: Deal or No Deal?

April 17, 2007
James V. Lorentsen

Editor’s Note: Many of you have received emails from us in the past week or two on the topic of SFAS No. 159 (hereafter ‘FAS 159’). Most have also undoubtedly been inundated with articles and reports on this new accounting standard. Given that, this article does not provide significant details regarding its basic mechanics. Rather, it discusses some of the nuances associated with early implementation of this standard. We delayed sending this out while we waited for some additional clarity from some or all the interested parties (e.g. FASB, SEC, big accounting firms). Unfortunately, not much additional clarity ever came. Since there is little time before the early adoption deadline, we decided to send out what we do know to date.

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The January 2006 - 2007 One-Year Look-Back®

February 15, 2007
The Disciplined Investor®

Our chief objective is to partner with you along the Path to Great Performance. Two clear ways we have found to get onto this path is by investing in the right individual sectors and the right combinations of those sectors. Of course, this means we need to avoid the poor risk/reward sectors either by not purchasing them or by selling them when appropriate.

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Christmas 2006

December 21, 2006
Rich Berg, Phil Nussbaum

As many of you already know, Phil and I write a personal letter celebrating this special time of the year. As the climate of political correctness intensifies, I suppose we take an even larger risk by writing this Christmas letter. As always, we have no wish to offend anyone. Rather, we feel compelled to share our joy with you regarding this special holiday.

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Financing Options for Financial Institutions

November 14, 2006
Michael Iannaccone

Possibly the largest and most difficult challenge that senior management of financial institutions face is managing and financing growth. The capital or financing alternative to choose could be a daunting task involving issuance cost, flexibility, EPS dilution, and capital treatment. Among the financing alternatives available to banks and bank holding companies are correspondent bank debt, senior debt, subordinated debt, trust preferred securities, convertible securities, preferred and common equity. In the following pages, Performance Trust provides an overview of each type of financing instrument, the advantages and disadvantages of each as a means to finance growth, and the capital implications in relation to regulatory capital requirements.

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SFAS 155 Update

October 25, 2006
James V. Lorentsen

As discussed in yesterday’s Disciplined Investor® concerning SFAS 155, the Financial Accounting Standard Board met this morning to discuss the implementation issues and industry concerns surrounding SFAS 155. The Board approved the staff’s recommendation to issue a narrow scope exception for securitized interests that only contain an embedded derivative that is tied to the prepayment risk of the underlying assets and for which the investor does not control the right to accelerate the settlement. In layman’s terms, it appears that discount MBS and CMOs will be exempted from the bifurcation test and thus not required to be marked-to-market through earnings.

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SFAS 155: Clear, Consistent, Logical?

October 24, 2006
James V. Lorentsen

In his letter to Berkshire Hathaway shareholders in 1998, Warren Buffet commented on how he wanted accounting rules to impact his decision-makers. He stated, “they should not let any of their decisions be affected even slightly by accounting considerations. We want our managers to think about what counts, not how it will be counted.”

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Driving Blind

October 11, 2006
Kurt A. Fritz, Robbie Howland

I (Kurt) drive a Dodge Ram 1500. It’s black. Couple of dents. Not very fancy. It does not have many bells and whistles.

Robbie Howland and I were talking about cars the other day. We were talking about all the cool new gauges some of today’s vehicles have. Direction finders, digital read-outs, and mapping systems; some even have video cameras for when you back up. Maybe some day cars will even drive themselves. I wonder if we will feel safe.

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The August 2003-2006 Three-Year Look-Back®

September 15, 2006
The Disciplined Investor®

Our chief objective is to partner with you along the path of Great Performance. We view great performance as a relative matter of peer out performance. Two clear ways we follow this path is by investing in the right sectors and combinations thereof, and also by avoiding poor sectors via divestment or by steering clear of poor risk/rewards as investments.

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Great Performance Beyond The Investment Portfolio, Announcing A New Strategic Alliance

July 24, 2006
The Disciplined Investor®

To achieve that vision, our mission is to help financial decision makers achieve results that surpass those they would otherwise attain. Therefore, we at Performance Trust are always looking for opportunities to enhance the value we provide to you, our valued clients. This effort on our part is not an easy one – our values and our mission statement require us to stay committed to a win-win total return methodology. And as you probably have gathered by now, there are not many organizations that align with us around this business philosophy.

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The Enemy Within

April 4, 2006
Brian J. Perry

Many of you may recall Rich’s letter on “Helping your Competition,” sent out late last year. The premise of the letter is that there are companies out there with products and services that ostensibly “help” you, while their main objective seems to be putting you out of business. One of our customers, Brian Perry, CFO of Webster Five Cents Savings Bank, in Webster, Massachusetts, read Rich’s letter and thought about how his bank was contributing to its own problems by doing business with companies intent on capturing their core business. We invited him to share his perspective here with you, in the Disciplined Investor®.

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Ten Years on the Path to Great Performance

February 22, 2006
John P. Behof

Just the other day I realized that I am approaching my ten year anniversary in the bond business. Most people think I am too young to have done anything for ten years, but it’s true. I must say that the journey has been filled with many great experiences and victories as well as many humbling moments.

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The January 2005-2006 One-Year Look-Back®

February 10, 2006
The Disciplined Investor®

Our chief objective is to partner with you along the path of Great Performance. We view great performance as a relative matter of peer out performance. Two clear ways we have found to get onto this path is by investing in the right sectors and combinations thereof, and also by avoiding poor sectors via divestment or by steering clear of poor risk/rewards as investments.

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Support VADMs A Superior Callable Bond Alternative

February 2, 2006
Richard S. Berg

Editors Note: For many of you, the current rate environment is causing net interest margin compression and earnings pressure. Portfolio managers are being encouraged to find ways to increase the portfolio yield. While we are fond of saying “yield is not what you get,” we are not ignorant of your everyday realities. Some portfolio managers may be mandated to increase current income. In this article we look at a mortgage alternative to agency callables that provides superior current income while keeping an eye on total return.

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Discount Tax-Exempt Municipal Bonds

December 9, 2005
Kenton J. Skarin

From time to time we send out a Disciplined Investor® that we hope will become a timeless “classic.” This is one of those articles. The concepts addressed below should be as relevant and valuable ten years from now as they are today. Sometimes these classic articles deal with theory (e.g. “Does Total Return Matter if I Never Sell?,” dated August 26, 1996), while others deal with a more specific ongoing investment opportunity. This Disciplined Investor is the latter. As such, it is our hope that you profit from it for years to come. It is also our hope that you recall the source of this relatively straightforward, yet very profound concept.

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Total Return = Yield + Duration

November 3, 2005
Kurt A. Fritz

I was watching the classic Disney film “Lady and the Tramp” with my daughter a couple of nights ago when a particular scene caught my eye. Tramp and Lady are sharing a plate of spaghetti and meatballs when unbeknownst to our two stars, they bite into the same strand of spaghetti. As they continue to munch, they are inevitably drawn together, and so the story goes.

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A How-To Guide to Implementing Total Return Investing

October 18, 2005
Alan K. Crain

The following article is an advance copy of the lead feature for our upcoming Bank Portfolio Manager®, a publication intended for the broader community bank industry. We continue our practice of giving readers of the Disciplined Investor® first look at the more timely Bank Portfolio Manager® articles.

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The August 2002–2005 Three-Year Look-Back®

August 26, 2005
The Disciplined Investor®

We conduct the Annual Three-Year Look-Back® as part of a Disciplined Investing Process. We believe that any disciplined investment decision-making process should follow a feedback and adjustment cycle like the one illustrated above. Shape Management® is one such disciplined process.

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Don’t Get Fooled

August 2, 2005
Mark P. Bodett, Terence Kaufmann

Those of you who have been customers for a while know that our firm occasionally recommends books. A recent recommendation is Fooled by Randomness by Nassim Nicholas Taleb. Admittedly Dr. Taleb’s name does not inspire images of action or intrigue in the way names like “Clancy” or “Grisham” might. While Dr. Taleb’s book may not be a typical summer page turner, it is definitely worth reading and has some direct applications to us as bond investors.

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Upon Further Review, Never Mind

June 30, 2005
The Disciplined Investor®

While we have not seen an official comment from the FASB, the FASB appears to have adopted the recommendation of its staff to nullify key parts of Emerging Issues Task Force (“EITF”) Issue 03-1 in a board meeting yesterday. The staff’s recommendations were to nullify the guidance on the determination of whether an investment is impaired as set forth in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance on the meaning of other-than-temporary impairment. Instead, the staff recommends entities recognize other-than-temporary impairments by applying existing accounting literature such as paragraph 16 of SFAS 115.

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The Meeting, Getting Results with ALCO

June 30, 2005
Lee R. Gibson, Michael L. Coogan, CFA

The following article will appear in an upcoming issue of the Bank Portfolio Manager®, our publication for banks across the country. Our policy is to afford readers of the Disciplined Investor® advance looks at the more significant articles about to appear in the BPM. In this article, Michael L. Coogan teamed with Lee R. Gibson, Chief Financial Officer of Southside Bank in Tyler, Texas, to share their approach to developing a high-performing ALCO process.

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Once in a Lifetime- Again???

June 7, 2005
Brad Bonga

Alan Greenspan is in the news again today commenting on the state of the financial markets. Today I read in the newspaper that he described the yield curve as “unusual.” Recently, he referred to how low long rates had fallen in the face of his consistent fed tightening as a “conundrum.”

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Handle with Care

June 6, 2005
Nigel W. Johnson, Sunil O. Kothari

Investors remember the rate rise of 1994 as one of the most painful episodes of the past 25 years. Many investors predicted (correctly for once) that rates would rise and so they purchased securities that they believed would offer protection in that environment. We now know that many of the securities that were purchased as an insurance policy for rising rates utterly failed. Investors would have been better served had these instruments borne the investment warning label, “HANDLE WITH CARE!”

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Alert: Great Investors Must Act!

June 2, 2005
Richard S. Berg

In our last Level Playing Field®, we discussed at length the historic opportunity to replace currently rich “middle” mortgage cash flows such as generic par-ish pools and sequentials with smarter barbelled cash flows, namely short PAChyderms in combination with long tax exempts (taxable munis or other call protected securities for investors who cannot benefit from tax exemption). Right now this trade is a win-win on both an economic and an income basis.

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It’s Official!

May 31, 2005
Richard S. Berg

For almost two months we have been waiting for the state of Illinois to approve our name change, being continually told it was “any day.” Well, we finally have written approval for our new name. Before I announce our name, I would like to give you the background as to how we arrived at this choice.

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Brian Battle Joins the Team

May 23, 2005
Brian Battle

The mission of our firm is to inspire financial decision makers to choose the Path of Great Performance and to help them achieve results that surpass those they would attain otherwise.

To that end, we are thrilled to announce the addition of Brian Battle. On May 3rd, 2005 Brian joined our municipal trading staff. Brian has spent the past decade at Griffin, Kubik, Stephens & Thompson Inc. — and the prior nine years with American National Bank & Trust, a wholly-owned subsidiary of First Chicago (JP Morgan) — analyzing, trading and underwriting Bank Qualified, General Market and Taxable Municipal Bonds.

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The Ugly Duckling

May 3, 2005
Andre P. Reynolds

When Andre Reynolds joined us a year and a half ago, he added his years of experience and expertise as a Federal Reserve Examiner and Credit Risk Team Leader to our knowledge arsenal. Today, he is an instructor for Bond Math University®, and many of you may recall his “economic conditions” presentation at the 2003 Advanced Course® as the representative of the Chicago Fed. Andre is a CPA who holds a Master of Management degree from Northwestern University and a B.A. from the University of Michigan.

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They’re back! Actually, they never left.

April 25, 2005
Mark P. Bodett, Terence Kaufmann

It has been some time since we wrote a Disciplined Investor® letter about FFIEC bonds or as we call them, Trojan Horses. Since it has been awhile, we thought we would revisit the subject to remind you to maintain your guard and to warn those who might be unaware of the danger. So let’s start with the basics.

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Why Floater Prices Float Down – and Sometimes a Lot!

April 11, 2005
Richard S. Berg

The following article is an advance copy of the lead feature for our upcoming Bank Portfolio Manager®, a publication intended for the broader community bank industry. We continue our practice of giving readers of the Disciplined Investor® first look at the more timely Bank Portfolio Manager articles.

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Why I’m Back

April 6, 2005
John P. Behof

April 12th 2004 represented a fork in the road for my life and career. On that day, I left my eightyear career at The Betzold Companies. That’s a long time. Many of you have been through that kind of decision and as you can imagine there were a lot of sleepless nights and long discussions with my wife, family and close friends. I decided to leave for a variety of reasons, but I would like to spend a few moments sharing why I made a much easier and exciting choice last week. I CHOSE TO COME BACK after my short hiatus.

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The January 2004-2005 One-Year Look-Back®

January 27, 2005
The Disciplined Investor®

These materials will be discussed during two teleconferences. Please call your advisor or 1-800 THE MATH to sign up for one of these important presentations if you have not already. This program will be conducted over the web, employing the Microsoft Office Live Meeting application. Please contact us immediately if you are not technically prepared for this event.

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Credit Union Total Return Quantile Grid

January 18, 2005
Celia T. Wong

Last January, we introduced a 50th percentile total return shape for bank total returns. We can now provide the same 50th percentile measures for credit unions as well.

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Legislation That Will Knock Your SOX Off!

January 13, 2005
Lawrence R. Levin

The Sarbanes-Oxley Act (often referred to as “SOX”), with its criminal penalties and broad impact on everyday corporate behavior, is the most far-reaching reform of corporate governance, financial practices, and reporting since the creation of the SEC as part of New Deal in the 1930s. While it is well understood that SOX impacts large publicly held financial institutions, few have recognized that it increasingly affects even small private financial institutions. Are all financial institutions (banks, credit unions, savings and loans, and other depositary institutions), regardless of size, focused and ready for the impact of SOX?

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Turning Losses into Profits

January 10, 2005
Charles M. Carpenter

Last year, Kurt Fritz shared the J-Curve with our readers (The Disciplined Investor® Volume 11, Number 9, titled “The Matrix,” dated March 4, 2004). The J-Curve represents a trade-off of short-term costs today in exchange for long-term benefits in the future. These trade-offs are the foundation of any successful person or business.

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Why Christmas? A personal message from Rich and Phil

December 22, 2004
Rich Berg, Phil Nussbaum

This Friday our company along with many others all across the country (in fact all across the world) will be closed for business. In preparation for this upcoming holiday people have made numerous trips up and down stairs getting the decorations and tree set up, climbed ladders to hang lights from the gutters, and frantically gone from store to store (or on-line) to purchase just the right gifts. Most everyone celebrates the “holiday season,” yet what is this day we call “Christmas?”

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EITF 03-01 Update

November 17, 2004
James V. Lorentsen, CPA

As many of you know, the Financial Accounting Standards Board delayed the implementation of EITF 03-01 for a second time. The EITF rule could require institutions to recognize an other-thantemporary impairment charge through earnings on debt securities that suffered market value declines solely due to changes in interest rates. The delay was influenced by an overwhelming response to the FASB’s request for comments on their proposed position. Over 235 comment letters are available on their web site (FASB.ORG); several of which were sent by Shape Management® practitioners.

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To Our Customers

November 3, 2004
Richard S. Berg

We are pleased to announce that on November 2, 2004, Nicholas W. Betzold, Jr., Chairman, CEO, co-founder and majority shareholder of the Betzold Companies has agreed to sell all of his shares in the Betzold Companies to Richard S. Berg, a co-founder of the Betzold Companies, and Philip M. Nussbaum, also one of the firm’s original partners. At closing, Rich and Phil will be the sole shareholders of the Betzold Companies.

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The Portfolio Optimization Dilemma

October 19, 2004
Sunil O. Kothari

In 1952, Harry Markowitz introduced modern portfolio theory and optimization to the world of finance when his paper “Portfolio Selection” appeared in the Journal of Finance. Since then, portfolio optimization has become a popular topic of research in both industry and academia. Despite its sustained popularity, optimization still causes a great deal of confusion. Although the term portfolio optimization itself implies a superior means of choosing allocations, many portfolio managers still choose to rely on heuristic approaches rather than utilizing optimization programs. While the theory behind these programs is sound, there are a number of practical issues that arise when implementing them as a stand-alone portfolio management tool.

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Custody Costs and Small Holdings

August 20, 2004
Charles M. Carpenter

One of our clients recently shared with us a strategy presented to them by another investment advisor and asked for our opinion. The proposal recommended the liquidation of a large number of smallbalance holdings from their portfolio and the reinvestment of the proceeds into one, larger-balance security holding.

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The July 2001 – 2004 Three-Year Look-Back®

August 2, 2004
Disciplined Investor®

We will be conducting our annual Three-Year Look-Back® for 2004 in two teleconferences which will be broadcast via MS Office Live Meeting on:

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Insulator Monitor

July 1, 2004
Seung Y. Lee

Over the last year and a half, many Shape Managers have purchased Price InsulatorsSM to add defense to the overall portfolio shape. We placed them in your portfolios with the mutual understanding that shapes change, and in the event of a rate rise, we must be prepared to divest from these shapes that were originally sold as InsulatorsSM.

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Disciplined Investors Don’t Bet on Rates

June 30, 2004
Lawrence R. Levin

Recently a group of top economists predicted the Federal Reserve would raise interest rates by at least 100 basis points over its next three meetings. Now that we all know where interest rates are going, can we just smile and go home or do we have to continue to manage our portfolios if we want success?

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The January 2003-2004 One-Year Look-Back®, “The Final Numbers”

April 13, 2004
Eric C. Brown

You may recall from “The January 2003-2004 One-Year Look-Back®” (Disciplined Investor® Volume 11, Number 5, dated February 5, 2004) that we broke our analysis down into three sections. Section I, “The Validity of Shape ManagementSM,” was completed and put to rest given the data then available.

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The NFL and Your Investment Portfolio

March 12, 2004
Mark P. Bodett, Andrew J. Hixson

The other day, I was scrolling through some of the earlier Beyond “Average Life” Letters (now known as the Disciplined Investor®) and came across the B.A.L.L. Volume 3, Number 18, titled “Ditka, the Fridge and Modern Portfolio Management,” dated May 13, 1996. The original B.A.L.L. compared assembling a football team to managing a bond portfolio. And, since we are in the midst of the NFL free agency period, I thought this might be the appropriate time to revisit the topic. Mark Bodett, a co-author of the original article and a Chicago Bears fan, assisted me with the update.

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The Matrix

March 4, 2004
Kurt A. Fritz

Have you ever had one of those ideas that hit you like a ton of bricks? I was reading an article about a business principle called the J–curve (Growth curve), and one such idea hit me. The general idea of the J–curve made me think of the movie, “The Matrix” (more on that later), but first let me briefly explain what a growth curve represents. The principle can be illustrated by a picture similar to the one below in which two different experiences are in force: positive (smiley) and negative (frowney). In business management, this curve is used for a variety of purposes, but usually it is used to describe productive change within an organization.

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A Call to Action: Sell this Bond ... Whether you own it or not!

February 11, 2004
Brad Bonga, Andy Hixson

Yes, you read the title correctly. We know of a bond that is such a great sale candidate that we are recommending you sell it even if you do not own it. Fannie Mae issued $125 million of the bond below earlier this week.

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