First some brief portfolio data.

a. Statistics
 
                 Details of the overall portfolio in 2008 are as follows:

 
 

Portfolio Return-actual	0.45%
Portfolio January 1, 2008	$116.50 million
Portfolio January 21, 2008	$116.70 million
Investment earnings 2008	$0.50 million
Investment Earnings 1981-2008	$73.84 million

 
 

 
           I won’t bore you with repetition of everything that got us to this juncture, but I strongly recommend that you reread some of the highlights of the reports that I have written over the last year.

           It has featured a litany of concerns, by me and by others, about the unusual confluence of risks in the marketplace. Things started to crack in the summer with the beginnings of the sub prime collapse and since then, in fits and starts, things have gone from bad to worse.

           Since peaking in October stocks have been in a steady decline and the AVERAGE stock is now down 20% from its highs. In that same period our portfolio has increased by 1% in value. The decline has accelerated in 2008 and the major indices have declined as follows since January 1 2008.              

 
 

S&P 500	-9.8%
NASDAQ	-11.8%
Dow Jones	-8.9%
Our Portfolio	+0.5%

 

       I am typing this on Martin Luther King day, which is a market holiday but not, of course, around the world.  Around the world this Monday, markets have fallen dramatically (in the order of 5%-7% for the bigger markets) which is a huge decline on a one day basis. The U.S. futures indicate a similar decline is projected for the opening of the U.S. market which, unless events change, would mean that the market had fallen an unprecedented 15% in the first 3 weeks of 2008.
 

      c.   CURRENT POSITION

      As the market has tumbled in recent days we have added aggressively to our common stock positions. The portfolio is currently distributed as follows:
 
 

1. We have been, and will remain, calm.

2. We have already seen a lot of carnage. We find bonds, except high quality variable rate bonds, unattractive with very poor risk/reward characteristics. Stocks, many of them down 30% or more from their highs, we find increasingly attractive. We are buying securities that are well capitalized, large, with a long history and ideally a long history of dividend paying. The characteristics of our stock portfolio are as follows:

       The only cheap area of the market that we are largely avoiding is the financial area (banks, mortgage insurers, brokers etc). They do have many of the characteristics we search for, BUT I am not sure which will survive. And before we worry about the return ON our money we first emphasize the return OF our money.

3.  We are avoiding all risky assets like the plague. This is risk as defined as the risk of permanent loss of capital. This includes lower quality bonds of any kind, poorly capitalized or second tier stocks, most real estate and most obligations of the banking system (except that we DO believe in the doctrine of too big to fail so we do not believe that any of the 5 largest banks can be allowed to fail). If the company isn’t huge, reasonably priced and well financed, it is highly unlikely it will become part of the portfolio. This is a MARKED change from our usual hunting ground, which encompasses stocks and other assets of all sizes and quality with price being the principal criteria (i.e. everything is attractive at a low enough price).

4. To the extent that we own stocks, we are buying large and reasonably valued corporations. If the world manages to muddle through this crisis we will do very well and if the crisis expands we will be hurt in the short run, but will be fine in the medium term and we will better off than 95% of market participants.

5. I have a shopping list for tomorrow and I will continue to buy as prices decline although I will proceed much more carefully when our common stock total exceeds 50% of the portfolio.

6. I think there are values in the following areas: Well capitalized modestly priced large common stocks around the world and the yen. I am neutral about the following: The U.S. $ and, probably, gold.  I am negative about the following: European currencies, emerging markets, risky poorly capitalized securities anywhere, real estate in Ireland, the U.K., Spain and, to a lesser extent, in the U.S. Banks everywhere. Most fixed rate bonds and particularly poor quality bonds.

         d. CONCLUSION
 
 

        We are now in the midst of the crisis and the market may well become page one fodder. The history of the U.S. is reassuring in the sense that we do tend to get into messes, often of our own making, but  our financial system is remarkably flexible and has a history of bending but not breaking. I am, of course, watching very carefully to see if this time is different.

        If you sense a more upbeat tone to this letter you are correct. A decline of 25% works wonders in creating value. But, and this is very important, we are in a potentially very chaotic period and, in the short run, anything can happen. I have no doubt at all that our year to date returns will go into the negative tomorrow and it will surely be a bumpy ride.

        We are in the very fortunate position that we have very large cash reserves to deploy and our year to date returns and our 3 year, 5 year and 10 returns comfortably exceed the market rates of return AND our targets.

        One of the things we may well experience, which will exacerbate things in the short run, is significant public selling by way of mutual fund redemptions from 401ks etc. a.k.a. PANIC. This has the effect for mutual funds of forcing them to sell things to meet redemptions. We expect distress selling of this type and we will take advantage of it.

       Please don’t hesitate to call or write with questions, although I would prefer them after 4.00 pm as the market is very, very demanding these days.