Fourth Quarter The fourth quarter was a relatively flat

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					Fourth Quarter 2005

The fourth quarter was a relatively flat period for income and growth investors, with some
exceptions. For one, the master limited partnerships we own took a hit late in the year,
particularly in December as tax selling started to kick in. Fortunately, certain of our picks made
back some of the lost ground in the first trading days of this year.

Communications stocks never really got on track last year, as Wall Street continued to worry
about the impact of technology on traditional revenue streams. Despite solid earnings results
from our picks—including successfully completed mergers—sector shares largely marked time.
Arguably the company in the best position long-term, Verizon Communications, continued its
yearlong slide. Verizon Communications, however, has bounced back a bit in early 2006, and I
expect a solid year.

Our bond and preferred stock investments were also weak going into the end of the year. And like
the LPs, they too have posted modest gains in the early days of January. So have the big oils and

Given the setbacks, it’s hard to get too negative on our overall performance for both the quarter
and the year. The Leeb Capital Model Income and Growth portfolio—on which your portfolio is
roughly based—beat both our bond/stock hybrid benchmark and the S&P 500 Index last year,
with far less volatility and higher income as well.

Our stars for 2005 were basically companies that generated outstanding business results. One of
these was Aqua America, which continues to grow rapidly by acquiring small, regulated water
utility systems. Another was Mid-American Apartment Properties, which has benefited from a
turnaround in rents and occupancy rates for multi-family properties as mortgage rates have ticked
higher. On the downside, Verizon Communications and our Limited Partnerships hurt
performance for 2005.

Accumulating a diversified mix of shares of well-run businesses remains the focus of the portfolio
going into 2006, and our success will largely depend on company fundamentals. As was the case
last year, we’ll continue to take profits in stocks that appreciate to the point where they’re a
disproportionately large share of your portfolio. With very few exceptions, we’ll take some money
off the table of any stock that hits 4 percent of more of your portfolio. That locks in gains and
limits exposure to a downturn, the odds of which grow along with expectations for a stock.

As always, enemy number one is the risk of rising interest rates and inflation. Over the past year,
the benchmark 10-year Treasury note was almost completely flat, as fear of inflation was offset
by worries about a slowdown. This battle continues as we move into 2006. But the goal of our
portfolio is always to minimize our exposure by limiting duration or sensitivity to interest rate
swings. In the case of stocks, we look for the ability to grow dividends, low valuations and/or a tie
to a commodity market like oil.

Like Stephen Leeb, I’m still bullish long-term on energy and will be until we see some real
conservation, a move to alternatives and at least one meaningful discovery of conventional oil
and gas reserves. My preferred vehicle will be the low risk super oils, but occasionally we’ll be
adding a high yielding Canadian trust or two to the mix.

Our fixed income picks, meanwhile, have been chosen for very low duration, relative to other
bond and preferred investments. For example, Vanguard GNMA has duration of barely 2 years,
allowing it to hold value even if rates should spike up from here. That’s why its biggest loss in the
past 20 years was less than 1 percent in 1994, a year when bond yields soared. Vanguard
Inflation Protected Securities raises its dividend when benchmark rates rise.
I use both as higher yielding cash substitutes as well as for ballast to overall portfolios. And,
despite flat returns in 2005, the logic for owning them on that basis is stronger than ever, given
the potential for higher rates and the fact that they yield only slightly less than much longer-term
bonds and notes. Note we’re also holding a fair amount of cash, which is now earning a solid
return. Cash is also a source of capital to take advantage of opportunities that appear.

One further point: As many of you have no doubt noticed, we don’t necessarily chase the biggest
yield in any sector. Rather, we’re interested in how sustainable a dividend is and whether it can
be grown over time. That growth means that we would get much higher returns than most of
today’s highest yields. In addition, in this market, very high yield usually means much higher risk
than investors are counting on. So, we believe that our danger element is lower as well.


Roger S. Conrad