Holiday Greetings;

October 31, 2001

We are pleased to announce the creation of our new web site for The Lemley Letter. The web site may be reached at: www.thelemleyletter.com or at www.budlemley.com. Each day we plan on having a thought for the day and discussing our purchases and sales on a more timely basis. We will update the Model Portfolio on line as transactions occur.

We also want to make our annual plea for funds for our kids in Sri Lanka. All of the children residing at the orphanage are there because of the terrible civil war that has been going on in their country for many years. The money we raised last year, $20,000, has helped to nurture the children for a year. We recently made a seed money donation of $5000 for computers for the school and we are hoping for a good response from all of our clients to further enhance the computer lab. Many of our clients have short-term gains this year. So in addition to being thankful for being able to pay taxes on short-term gains in a year when many folks have astounding losses, we are offering the additional opportunity to lessen those taxes by making a generous contribution to a very worthwhile charity. 100% of your dollars go to the care, feeding, and education of the children. A stamped return mail envelope is enclosed for your convenience.

The old saying "we live in interesting times" has been all too true these past few months. The events of September 11th have affected us all and will continue to affect the market for longer than many pundits and politicians want to believe. Before the tragedy the stock markets were heading lower. The September 11th tragedy and the subsequent closing of the markets exacerbated the sell off and an interim market bottom probably occurred on September 21. The one week sell off would probably have taken four weeks in normal times. So the rebound of the past month is natural, but not permanent. We played the original rally off the September lows poorly. We began investing on the Tuesday after the 700 point Monday drop. We continued buying for the rest of the week expecting a strong rally after the Dow Jones Stock Futures traded below 8000 on early Friday, September 21. The rally did happen the next Monday but when there was no follow through on Tuesday we decided to sell. In retrospect, we believe that we were still too traumatized by the happenings to assume even the small risk of the positions we were carrying. For the past nine months the main purpose of our trading has been to try and catch a rally for a one week to one month trade. The last three years we have done well following our instincts. The only time we didn't was in November 2000 when we held our trading stocks rather than closing out our positions in mid-November and buying back at year-end. Luckily the Greenspan interest rate cut in early 2001 produced a wonderful rally that allowed us to lock in our gains for the year in the first two weeks of 2001.

We envision the same scenario this year as last year, with the current rally continuing into mid November. Our larger accounts are no more than 20% in the market and even very small accounts have cash on hand. We have concentrated our investing in several extremely sold down telecom and tech stocks looking for 50% or more rebounds over a short period. Please notice we didn't refer to the stocks we own as undervalued. They aren't. But they all are down 80% or more from their highs of the last two years and so we expect a bounce in the next few weeks. If we get the bounce we'll probably take our gains and look to get back in at year-end. This active trading has produced gains of 10% to 30% this year at a time when the DJIA is down 12%, the S & P 500 is down 17% and the NASDAQ is down 30% plus.

We published a note from our good friend Trish in the Spring 2001 Lemley Letter. We also published our response in that Letter. Our online web site, www.thelemleyletter.com has a copy of the Spring 2001 Lemley Letter. Just last week we received another note from Trish.

We are publishing Trish's note and our response because she raises an important point that we wish to revisit.

Dear Bud ...I appreciate the flurry of patriotic buying, quite appropriate under ghastly circumstances. But now I would like to go back to the "hold and wait" philosophy. Just don't want to play the game. I don't believe in it, I guess. I do believe in my good friend and advisor Bud choosing 8 - 10 good stocks, (maybe some farm machinery, and companies that do something important: food, building, news etc.). Then let them be. Maybe it's crazy and I read carefully your newsletters but still don't like the churning with multiple, multiple confirmation notices. Let me be low maintenance....

Dear Trish:

Thanks for your note. We have followed your request of last Spring as best we can. We would first like to remark on your comment on confirmations. We agree that when we go to cash and then reinvest that a large number of confirmations are created, especially when coupled with the canceling and rebilling of confirmations to correct a numerical error or omission of some totally irrelevant but legally necessary item. Many clients have asked to not receive confirms and to rely on the monthly statements which show the actual transactions after all corrections have been made. Unfortunately confirms remain a legal necessity. Someday the SEC will realize that computers and email communications are here to stay. Now to more substantive matters. Over the past year we have followed your request to the best of our fiduciary responsibility. After raising cash last spring, we made very few trades in your account except to take profits in stocks that had risen 50% in a few months time and to set up one or two losses for tax purposes. When the markets dropped in September we began the process of reinvesting the money for an over year-end trading opportunity. We have been one quarter as active in your account as in our normal accounts and one tenth as active in your accounts as in our own and our most aggressive accounts. We would suggest that it is our activity of raising cash last Spring that has you happily oblivious to the carnage that has occurred in many stocks, mutual funds, and personal portfolios over the last year and one half. For the record, your large account is up 20% and your IRAs are up 25% for the year, if we exclude your inheritance stocks. In that same period the DJIA is down 12% and the S & P 500 is down 17%. Thus our "semi-churning" management has allowed your account to outperform the popular average and index by 30% to 40%. That's about $80,000 in retained and added value to your account. Our clients, including you, have weathered this storm because of active trading. The storm is not over, but we will attempt to fulfill your wishes as much as our fiduciary duty allows. Regards, Bud.

We believe that markets are different now. Buy and hold has not worked for the past 2 years. The markets are up a huge amount over the last twenty years. We refer not only to the stock markets where the DJIA has risen from 700 to 10000, but also the bond market where yields on U.S. Treasuries have dropped from 15% to 5% on thirty-year bonds and from 21% to 2% on short maturities. Moreover, real estate prices for both developed and undeveloped land are at record levels. Throughout financial history, periods of excessive appreciation in the value of assets have always been followed by periods of slower growth or actual retracement.

This pendulum effect can be seen in nature where areas go from drought to flood, where Lake Michigan's water level drops to perilously low levels and then five years later the water level of Lake Michigan threatens to flood Chicago. The bible tells of seven years of feast followed by seven years of famine. Obviously, the pendulum effect is not a new phenomenon. In politics, relations between governments ebb and flow, as does the swing of the power of political parties and even in our own lives feeling good and bad are all part of the pendulum of daily living. So it is only logical that the same effect occurs in the economy and the stock market.

Before September 11, we were looking for a selloff into October, then a rally to mid November followed by a selloff in many stocks if not the DJIA into year end. We then expected a new year 2002 rally before the bear market would resume in earnest in February when it became obvious that the recovery would not occur on the time table being currently suggested by many pundits and politicians. September 11th only reinforces our conviction and makes us more certain that wishful hoping is not going to solve the serious economic and geopolitical problems we face.

We believe that the stimulus package being propounded is a joke if it is meant to stimulate the economy. Lower taxes only created a larger deficit in the 1980s when the blue-collar layoffs in the auto and steel industry brought on recession. The current recession is not a blue-collar recession and the white collar or rather polo shirt/sweater folks losing their jobs have been very important to the consumer boom economy of the 1990s. We think the budget deficit will reach $200 billion next year. Lower interest rates are not stimulating the economy. The only thing lower interest rates are doing is stimulating retirees to take funds out of safe investments and seek more speculative high yield bonds to attempt to supplement their retirement income. The increase in junk bond issuance is a throwback to the 1980s and it will end badly. We will keep trading and trying to make money on the edges. Stocks are not cheap. And risk remains real.