American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Aug. 2005 – Litigation and its Discontents

Investors who follow our High-Yield Dow model have been steadily accumulating Merck since last October, shortly after news broke that the firm could face enormous lawsuits related to its blockbuster drug Vioxx. Most recently a Texas jury delivered a $253 million verdict against the firm. Texas law limiting punitive damages will reduce the award substantially and the company promptly announced its intention to appeal the verdict. Nevertheless, this is just the opening salvo in the Vioxx drama – suits could number in the thousands nationwide. Trial lawyers are licking their chops and the financial press is in a feeding frenzy.

Merck shares tumbled $2.35 to $28.06 on the day the verdict was announced. Its indicated yield of 5.4 percent reflects an inordinately risky stock, with inordinately large potential returns. Product liability is a natural byproduct, and perhaps a necessary evil, in our free enterprise system and the outcome for Merck is uncertain. Our hypothetical portfolio embraces uncertainties such as these; on average losses from those firms that have gone “belly up” would have been vastly outpaced by gains from firms that have recovered. We will continue to buy Merck in accordance with our 4-for-18 strategy.

Newmont Mining is also embroiled in litigation. Criminal proceedings have been brought by the Indonesian government related to the discharge of waste material from the company’s Minahasa mine on the island of Sulawesi. Newmont previously settled a lawsuit related to alleged mercury and arsenic poisoning at the site. That settlement affirmed that there was no evidence that Newmont’s activities caused the plaintiff’s diseases.

A study by the World Health Organization and an initial Environment Ministry report refuted the government’s assertions. We continue to recommend Newmont as part of a diversified portfolio of gold related assets that includes our five other recommended mining stocks and the exchange-traded funds found on page 64.

New Rules at Vanguard

Owners of Vanguard shares are facing new restrictions. Beginning September 30, holders of most Vanguard equity funds will no longer be able to repurchase shares if that fund’s shares were redeemed during the previous 60 calendar days. The rule is intended to discourage short-term trading that only drives up costs for all investors. For all who follow our approach, the new rule should not be burdensome. The restriction applies to the Vanguard funds recommended on page 64 with the exception of the Vanguard Short-Term Investment Grade Bond fund.

Also in This Issue:

Financing Elder Care
Fixed-Income Investment Strategies
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield