There are a number of personalized attachments.

For clients who have been with us for at least five years, we have included a graph that outlines the performance of the portfolio (blue line) and our longer term target (pink line). In virtually every case the actual results exceed our target and this has been true, importantly, for most of the life of the portfolio. The target level is critical to your financial planning summary and is key to our long term planning. It is significant that the portfolio has exceeded our target over the entire length of the portfolio (29 years) and it gives us a reasonable expectation about a positive outcome in the years ahead. Not in any given year, of course, but over the longer run. It obviously isn’t something we can guarantee, but it should be an encouragement as we look ahead. Our basic value orientation has not, and will not, change.

We have also attached a printout of your portfolio balances on January 1st and December 31st of 2009.

The remaining personalized attachment is an individual report that lists the history of your portfolio since inception. It records the changes in two year groupings and measures investment earnings, your net annual deposits (withdrawals) and your % returns for each calendar year. I have appended a note to this page if there is anything unusual about a particular return i.e. unusually above or below the portfolio average.

The annual report for the portfolio (previously emailed and available on the website) is also enclosed in hard copy.

The portfolio is currently $135 million, it earned 14.3% in 2009 and we have 101 clients.

In 2008 we had a negative return of -5.1% with our conservative diversified portfolio. It appears that we outperformed approximately 97% of managed diversified portfolios over the last one and five years. So, oddly, in the year that we had a negative return, I had the best year of my career. The investment process is a mixture of positive and negative returns and the key to long term success is to manage and minimize the inevitable downturns.

In 2009 we earned 14.3%. The year was made up of an awful period, which ended on March 9th and then a powerful upturn for the remaining nine months of the year. We were a heavy buyer of common stocks in the first four months of the year as prices declined at a rapid pace. As prices advanced, and obvious bargains disappeared, we sold into the rally and we are now conservatively invested (see the annual report for more details about the portfolio and the current portfolio allocation).

I ended the year more cynical than I started the year and very aware of the implications of “crony capitalism” and the dominance of corporate lobbyists over both political parties. As is true for many of the disquieting things that have happened in the past few years, my task is to incorporate the new, and changing, reality into the management of the portfolio. I may not, and do not, agree with much of what has transpired but, of necessity, it is important to adapt to this new and increasingly uneven playing field.

I discussed before the difficulties we have had as we have negotiated with Fidelity over reduced commissions on stock purchases and sales. Over the years we have achieved significant discounts for our commissions that are visible (stock commissions) and invisible (the ability to purchase load funds at no load prices). The annual savings have been large, but we have been unable to budge them on their cutoff where clients with more than $1 million at Fidelity can transact at markedly cheaper rates than clients below those levels.

It has made many previously unprofitable transactions profitable, but we are still struggling to attain equal benefits for clients below the cutoff. In addition a number of transactions have required larger minimum investments to be cost effective. I should not overstate the penalty on our smaller clients, but we are determined to correct this inequity.

We take a conservative approach in managing your assets, but also in how we suggest that you structure your entire financial life. Let me illustrate by providing for you, in aggregate, the complete financial statements of all of our clients.

Our clients had the following balance sheets in 2003-2009:

The overall and the individual balance sheets are extremely conservative with debt that is both minimal, as a percentage of net worth, and also predominately low cost (5.1%) and fixed rate.

The figure for debt as a percentage of gross worth is extraordinarily low at 6.0% of total client wealth and this is part of our overall approach where we emphasize balance sheets that are structured to withstand the worst of times.

The strength of our balance sheets and our conservative approach to investment have helped immeasurably in 2008-9 and will be invaluable in the next few years if, as seems likely, we are faced with continuing challenges.

The balance sheets are fortresses of strength. Real estate will continue to be a drag on net worth for the foreseeable future, but I suspect most of the damage has already been done. The vast majority of our position in real estate is, of course, your primary dwelling so in many ways it isn’t of particular concern as you don’t intend to move and, in any event, you will continue to require shelter. The significance for me of the relatively large real estate exposure is that I have discouraged additional real estate purchases unless they were available at extraordinary discounts.

We can, as stated before, make no promises apart from our basic promises:

• To invest all of our own assets in exactly the same way as the portfolio, i.e. “We eat our own cooking”
• To have no conflicts of interest. To always act on your behalf.
• To invest following our basic and conservative value methodology.

We do however know how the portfolio has performed over the last 29 years and the performance has been encouraging.

In the last 80 years (1928-2007) the following major asset classes have achieved annualized returns as follows (Ibbotson data).

The fact that we have outperformed the riskiest asset class (stocks) with a fraction of the volatility is also encouraging.

The fact that we have just endured the worst decade in market history and have continued to grow and meet our targets should also be encouraging.

The historical record of the performance of different allocations is important and forms the basis for how we organize your portfolio in the long run. We look at this in the context of the factors listed below:

• Your ability to tolerate declines in the value of the portfolio (i.e. your attitude towards all of the different kinds of risk.
• Your goals.
• Your age.
• Your need for cash in the medium-term and your tax status. We carefully allocate your funds via pension funding and other measures to maximize your long-term after-tax returns. Your current and future marginal tax rates are vital ingredients in our decision process.
• The current valuations in the marketplaces versus their historical ranges to measure areas that are more, or less, dangerous based on all historical precedence i.e. what, if anything, is cheap in absolute terms.
• Your responses to our risk questionnaires.

The answer to the second question is easy. No. We always act on your behalf and in your best interests.

On any given day I make numerous “block” trades in individual securities and the blocks are allocated at the end of the day by Cindy Cook, based on the needs of individual clients using our proprietary software. I never influence the daily allocation of securities and this arrangement of a separation between the trading and allocation functions fully meet the wishes and requirements of our regulators (The Securities and Exchange Commission).

In securities trading, as in all other areas, we always utilize or recommend the best combination of low cost provider and superior execution and service. My admittedly back of the envelope calculations, suggest that the cost savings in the last two renegotiations add at least ½% p.a. to your annual returns. The commissions that Fidelity offers are significantly cheaper for clients with more than $1 million at Fidelity. We continue to press them to level the playing field so that all of our clients can take advantage of the cheapest rates.

In the summary of the financial planning statement we discuss the attainment of your stated goals, perhaps the most important part of the whole management process.

The goals involved have all kinds of time frames, ranging from the very short to the long term but, in virtually every case, all of our clients have a larger time frame that is at least 10 years in length. Our median clients have a joint life expectancy of 30+ years. It is because we are working with lengthy periods of time that we pay so much attention to the long-term historical patterns of investment returns (see the section above on the long term Ibbotson data). The averages are important and, indeed, form a critical part of our projections, but equally important is the variability in those returns. I am not going to go into the latter aspect in great detail here, but it is something that we pay particular attention to and it is important. (The field of study that is relevant here is Monte Carlo simulation theory.)

The key point is that it isn’t just the average return over a period that is critical but, more importantly, it is the timing of the individual returns and, particularly, the importance of avoiding very sharp declines at key points in the process e.g. the debacle for many folks in 2000-2 and 2008. This didn’t seem a very important point for many participants until recently when they discovered the devastating effect of having very significant declines and the effects that had on their imminent retirement, etc.

The goals that we have are simple. We establish viable long-term goals for the portfolio based on a reasonable and conservative appraisal of the long-term record and we attempt to attain those goals with the minimum amount of volatility.

The summary in the financial planning statement is built around the belief and expectation that the portfolio will meet the target goals in the long run and that the individual portfolio is structured to meet the cash flow needs of shorter and medium term goals. We believe that it provides a solid and realistic way to view the future and that the projections we make regarding longer term goals are reasonable and conservative.

My part in the process is to offer a steady hand at the helm, to apply consistent principles to the management of the portfolio and to communicate our progress to you so that you completely understand the process and our ongoing activities.

We hope that we can continue to serve you far into the future and that our partnership will be as successful in the future as it has been over the life of the portfolio. I suspect that the next 29 years, based on the accelerating pace of change, will be particularly challenging. I look forward to the challenge.:)

Please call if you have any questions or concerns. We are always available and are happy to talk, answer questions and, hopefully, to provide useful advice and answers.