Many of us were surprised by the strength and duration of the equity run-up. We still believe that the economy is improving, but remain quite worried about the long-term effects of high unemployment and bad real estate loans that remain on bank books. The risk is that investors are chasing returns. Bonds look really expensive and so do many categories of stocks.

Why Things Could Get Better in 2010:

• Real recovery continues to improve
• Benefits of real (non-stimulus related) U.S. competitiveness improvements
• Transition out of stimulus works without re-crash or inflation
• Cheap natural gas and other (surprisingly) inexpensive energy sources help to control inflation and provide economic assistance during the “real” recovery

Why Things Could Get Worse in 2010:

• Many under-collateralized commercial real estate conduit loans start maturing later this year—refinance risk is real
• Bad banks will deteriorate
• Unemployment stays bad and rapidly rising interest rates will end the party
• Transition out of government stimulus results in re-crash or inflation
• An “unexpected” oil shock occurs

Positioned for the Long-Term

At times like these, it’s difficult to keep one’s focus as a long-term investor. There is a huge amount of fear and uncertainty out there which leads to short-term thinking. Our job is to focus on the long-term and leave the market timing to market timers. I think the evidence is strong that we’re working really hard to do that for you.

Growing the Firm

We are building a great firm here. We are privileged to have senior executive Tom Mulroy join us as COO. He brings more than twenty years of financial industry experience to our team. Don Scott, CEO of Wanger OmniWealth, is a force of nature and the best business partner a man could wish for. I continue to work with analysts Lee Wolf, Joel Hainsfurther, and Raja Vannela, as well as the staff of ACG, to evaluate investments, managers, and deals, each and every day. We have amazing advisors and some of the best friends around.

We couldn’t be more excited. Email us at: info@wangerinvestments.com or visit us on the web at: www.wangerinvestments.com.

Best,
Eric Wanger, JD, CFA