This is a supplemental report of the type issued after 9/11 and during similar crises. The crisis that we are currently in is the one that I have been warning about in recent months and its severity and duration is, at this point at least, unknown. I will send you updates as things evolve.

          First some brief portfolio data.

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

 
 

Portfolio Return-actual	0.75% (7.2% p.a.)
Portfolio January 1, 2008	$116.50 million
Portfolio February 7, 2008	$117.00 million
Investment earnings 2008	$0.87 million
Investment Earnings 1981-2008	$74.21 million

 

        b. Background
 
           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.
 
 

 
          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 payments. 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 obviously 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, some 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  largest banks in the world 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 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 and most fixed rate bonds and particularly poor quality bonds.

         d. CONCLUSION

 We are now in the midst of the crisis and the market and the economy may well remain page one fodder as they have been in recent weeks. 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 at different times this year and it will surely be a bumpy ride.

              We are in the very fortunate position that we have 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.

        Much of the above is a straight reprint, but it is still pertinent and, as we increase our common stock purchases, it is well worth the re-reading.

         As our holdings grow larger the volatility of the portfolio will increase as we will have a larger percentage of the portfolio in assets that are more subject to market movements. This doesn’t concern me at all, but you should be aware that the portfolio will be more volatile than it has been in recent years.
 
        I am excited about the purchases I am making although I have no ability to predict how low their prices might reach. What I DO know is that they are attractive at current levels. My usual response if they fall in price is to increase the size of our holdings until we reach our self imposed limitations.

         It may seem odd that we are buying in the midst of all this bad news and especially because we have been warning about the bad times for a number of months. But this is, oddly, how it works.  As the bad conditions are recognized they are reflected in the markets (many securities are down 30%+ including most of the erstwhile favorites – Google, Apple etc). With declining prices come opportunities although only a minority of declines create opportunities.

         Market prices in the short run are like a voting machine representing the current mood of the investing public, which is subject to wide swings of emotion. We know when something is worthy of purchase, but we never know how far the stock will decline propelled by market forces. Our salvation lies in the fact that in the longer run the market is a weighing machine and values are recognized.

         The difference with this crisis was that there was a significant risk of market disruption and a risk to the whole framework that exists to control and facilitate the world economy. This fear is receding but, sadly, only because the problems have been brushed under the carpet. They will reappear later and, probably, in a more virulent form but that is a battle for another day.

    So to reiterate:
 

1. We own a lot more common stocks than we have in the last few years. The purchases are attractively priced.
2. They may decline in value and we will buy more.
3. We are still watching for system breakdown, but the risks are receding.
4. We will almost certainly have negative returns (on a year to date basis) at various points this year. This is not a concern.
5. I am becoming more positive about our prospects for the next few years.
6. Hold on to your seat belts.

 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.