Certainty is the elusive goal of financial market participants. We would all like to reach a perfect sense of confidence regarding current and future events to guide us in our investing, but of course such assuredness is an impossibility. In fact, our financial markets are designed to deal with uncertainty: it is the intersection of investors' differing views about the future that creates the justification for markets in the first place. But even though uncertainty is a well-defined concept, we are bombarded these days by Wall Street analysts' concerns about a "lack of visibility." It is almost as if we are supposed to feel sorry for these prognosticators and ourselves - boy, if these "experts" can't figure out the direction of the economy, interest rates or whether XYZ will ever sell any more widgets, we had all better climb into a hole and wait until they tell us the coast is clear!

The truth is, perfect "visibility" has never really existed. Many of the analysts who now complain about the murky outlook were the ones who seemed to have perfect foresight just a few years ago, when nobody predicted the recession and almost no one questioned the New Era economy and the collapse of entire industries (well, we at least raised our hand). The point is that even though the landscape seems more uncertain today, it really isn't. We all have to deal with uncertainty daily, and with hindsight, we can now say the greatest challenges often arise when the level of uncertainty is barely perceptible. Today, the lack of visibility on two major issues has created significant uncertainty for investors: 1) the crisis in corporate governance and related conflicts-of-interest; and 2) the outlook for the U.S. economy/financial markets.

The first issue encompasses a broad spectrum of recently uncovered scandals: Enron, Andersen, Tyco, Adelphia, ImClone, WorldCom, as well as the intricate web of conflicts faced by Wall Street analysts. Taken as a group, these events underscore the role of trust in supporting our financial markets. While some may wonder why these scandals all seemed to erupt at once, market historians would note a pattern similar to prior boom/bust cycles: a receding tide lays bare a great deal of garbage that previously went unnoticed. Just as the excesses of the 1920s led to the uncovering of wide abuse by former titans such as Sam Insull (one of the first serial acquirers) and Richard Whitney (Chairman of the NYSE), so too will names like Skilling, Ebbers, and Kozlowski create a bleak history for future generations. It was not too long ago that companies were praised for their ability to skillfully manage corporate earnings, or that the aggressive treatment of stock options provided only salutary benefits to the issuing companies and their investors. Today, the tables have turned and the imperial CEO is now viewed as a villain, straight out of a Karl Marx term paper. Excesses appear at the end of cycles because during the boom, investors tend to see only what they want to see.

Yes, the former heroes are now viewed as the villains. But truthfully, this is more an issue of changing perceptions rather than an epidemic. Greed has always been a prominent feature of the corporate landscape: we just don't perceive its malignant effects until it's too late. As we and others pointed out long ago, many of the misdeeds -- earnings management, exuberant option issuance, excessive acquisition activity -- were in plain sight yet ignored as the stock market boom picked up speed. While it's tempting to hyperventilate over the breadth and magnitude of these events, we expect the plot to unfold much as it has in previous episodes: investigations will occur, crooks will be punished, new government regulations will appear (perhaps a few will be helpful), and ultimately, investor confidence will be restored.

It's worth noting that our clients avoided the most egregious of these recent corporate governance challenges, and this has helped our portfolios outpace the major indices over the past year. Part of the reason, we believe, is the emphasis in our analytical work on the quality of management. As we have detailed in past letters, we spend a great deal of time assessing management's strategic skills in allocating capital, and we require that the top executives act to maximize the long-term intrinsic value of the business. In addition, these managers are the stewards of the shareholders' capital, and it's only fair that we insist their economic interests be properly aligned with ours (ideally through share ownership). This is an important element of our entire philosophy, and while it does not provide a guarantee against management malfeasance, we think it stacks the deck in our favor to an important degree.

The second issue - the lack of consensus on the future direction of the economy and markets - seems to become more worrisome every day. For many of the Wall Street analysts, the view is foggy: the economy's uneven growth pattern presents a particularly wide range of potential outcomes. To be sure, this does not appear to be a textbook-style cycle: low inflation and interest rates have led to a muted recovery so far, and current stock market activity seems to imply another downturn in activity. Visibility is further confounded by a weak U.S. currency and a growing budget deficit. Frankly, we find it ironic that so many investors focus on macroeconomic issues (which tend to have relatively long cycles) when these same folks trade in and out of the same stock a few dozen times before lunch!

In fact, good macroeconomic visibility is a mirage. In the most recent quarterly survey of economists by the Wall Street Journal, the best estimate of first quarter GDP growth was off by a factor of 2.5x! It's also worth pointing out that despite better-than-expected economic growth during that same period, the stock market (which had already fallen for two straight years) responded by . . . declining even further. Good visibility or not, we remain skeptical that anything truly worthwhile for the long-term investor can be gleaned from the current economic tea leaves. The one thing we will admit: we are impressed by the U.S. economy's recent strength in spite of all the difficulties of the past year. As for the future? We remain solidly agnostic about the economy's near-term direction but convinced we are somewhere in a cyclical pattern, not a secular decline.

The stock market has been weak, and each day we are intrigued by the better-than-average businesses being tossed aside at the first whiff of controversy. It is often said that a stock market recovery climbs a "wall of worry." Today, that wall appears to be a mountain. That's fine with us, because as more investors climb into their bomb shelters to await better visibility on the corporate scandals and the ups and downs of the economy, the better investment opportunities we'll find. U.S.-style corporate capitalism is facing another in a long series of tests, just as the economy faces a unique set of circumstances. We know capitalism will survive (it isn't perfect, but who really wants the alternative?); likewise, we would not underestimate the strength of the U.S. economy. Our confidence leads us to be buyers of great businesses now selling at depressed prices. We recognize that our efforts may not be fully rewarded until others gain more perfect vision, but as we've learned many times during the last quarter century, visibility is overrated.