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	-1.0%
Portfolio January 1, 2008	$116.50 million
Portfolio March 10, 2008	$114.80 million
Investment earnings 2008	-$1.13 million
Investment Earnings 1981-2008	$72.21 million

 

b. Performance

        Our goal is to mute, but not eliminate (that isn’t possible), the downside and capture much of the upside. Our success in that regard is well documented (see the investment policy statement).

        The investment markets are always challenging, but never more so (with the exception of the period from 1929-1933) than over the last 10 years. Commentators and mutual funds might suggest that things, with the exception of the technology stock debacle, have been fine, but the data suggests otherwise.

     The S. and P. Index has increased a miserly 18% in the decade. Folks that isn’t 18% per annum, but rather 18% in total! The NASDAQ has actually lost value since 1998 by 20%. Both performances would be increased by the annual dividends which added an average of 1–1.5% p.a.  Clearly most people would have been better off in money market funds.

     Our record, as you know, has been quite different over the last 10 years and also over the life of the practice.
 
 

c. Current Situation

           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.

           We now seem to be in the third wave of the crisis and I can’t emphasize enough the chaos in the world credit and currency markets. Both of these get less coverage than the stock market, but they dwarf the stock market in size and in their overall influence. Things that seemed impossible a month ago now seem commonplace. The following very large companies have all had their futures seriously questioned in the last week – Citicorp, Bear Stearns, Sallie Mae (student loans), the Federal National Mortgage Corporation and the Federal Home Loan Corporation. We are now in new, and scary ground, and it is unclear how this will resolve itself in the short and longer term.
 
            The credit markets (bonds etc.) are experiencing serious upheavals on a daily basis as liquidity dries up and multi billion funds and companies have disappeared rapidly in this debacle. The critical feature that all of the failed companies have is a reliance on a large amount of borrowed funds (leverage in the trade) and no backup plan when those funds dried up.

            The Federal Reserve is doing everything it can to stop the panic but, significantly, without having any obvious effect on the ongoing crisis.
 

d.  Our Plans

      I wrote this in the last report:  “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.”
 
A month later, the decline has accelerated, my upbeat tone is somewhat modified and the quote “anything can happen” has proven to be all too true. Our returns have slipped into the negative and the bumpiness is now quite severe.

      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.

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.

7. We have been and will remain calm.

8. Our stock portfolio has the following characteristics

The companies we own are well financed, large and have a long history of dividend payments.
 
9. 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).

10. 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.

11. Our nervousness has led us to establish significant short positions to offset some of out existing stock positions. We are now also noticing that our variable rate bonds are being battered and we can expect more of this punishment although there should be no long term effects in that sector.
 
 

        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.
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 45%+ 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.

      I wrote this in last month’s letter:

 “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”.

            In recent days it has wriggled out from under the carpet and is now raging once again throughout the world’s financial markets.

         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. I apologize for anyone where routine financial planning has been delayed as all our endeavors have been deployed to the portfolio and that seasonal bugbear courtesy of the I.R.S.