10 Nov 2009 Dodge & Cox - Q3 2009 Commentary ( Portfolio )
After a dramatic rally in the equity markets since March 2009 lows (S&P 500 up 58% and the Fund up 76% from March 9 through September 30), some observers are questioning whether investors have become too optimistic, given the current outlook for the domestic economy. We are reminded of the classic expression: “it’s tough to make predictions, especially about the future.” At Dodge & Cox, rather than attempt to forecast near-term economic or market results, we consider the range of potential outcomes for individual companies’ profits and cash flows during the next three to five years. We use this information in selecting the Fund’s investments and are confident that many attractive investment opportunities remain available over our longer-term time horizon.

Opportunity in Health Care - The health care sector of the U.S. economy has been getting significant attention lately, due to the well-publicized movement for government reform in some fashion. In our view, the cloud of uncertainty hanging over the sector is giving us the opportunity to invest in solid business franchises in pharmaceuticals, medical devices, and services at their lowest valuations in decades. Our fundamental research and stock selection process continues to be “bottom-up” oriented, focused on the long-term outlook for and valuation of individual companies. We develop a range of potential outcomes, incorporating downside risk and upside potential, for each company’s profits and cash flow. As we assess the possible impact of U.S. health care reform, we believe current stock prices for many leading companies reflect a fairly pessimistic scenario and may not reflect positive developments. For example, technological innovation will continue to drive advancements in medical products and services. We also believe the developing world is likely to be a source of significant long-term incremental growth, as more resources are dedicated to modern health care.