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

 

Portfolio Return-actual	2.8% (8.4% p.a.)
Portfolio January 1, 2008	$116.50 million
Portfolio May 2, 2008	$120.70 million
Investment earnings 2008	$3.3 million
Investment Earnings 1981-2008	$76.5million

 

         Some random, but hopefully pertinent, comments.

      1. Contacting Us
 

           I wasn’t clear in my previous reports so let me clarify. Nancy is available by phone at any time during the day. In my case, the market can be, and often has been recently, demanding of my time between the hours of 9.30 and 4.00. However, and this is always true, call me with anything at any time and we can either discuss it then or, if the day is busy, I can call you back at the end of the day.

      2. The Usual Litany of Worries
 

            For the first time in living memory I will not repeat my laundry list of worries about the world economy and asset markets of every stripe. Does this mean the worries have gone away? No, but as time passes the extreme danger recedes. I should, however, add that the underlying problems have NOT been solved and they will come back later in a more virulent form. But that is probably a battle for another day. In the Berkshire Hathaway meeting this weekend Warren Buffett concurred with this view i.e. there will be a lot more pain, but it will be manageable.

           I do suggest, however, that you keep in mind, or reread, the problems that I discussed in the previous reports as they will be affecting us , in varying degrees, in the months and years ahead.

       3. Chairman Greenspan – fool or villain?
 

            It stuns me, and other thoughtful commentators, that Chairman Greenspan has the unmitigated chutzpah to try to minimize his role in the financial debacles of the last decade and, stunningly, people seem to believe him.

             I can’t emphasize enough that if blame is to be assigned to any one person for the tech boom/bust and the current problems the fingers point directly at Mr. Greenspan.

       4. Why have we traded so much in recent years?
 

         If you look back at my reports from the late 1990’s you see Warren Buffett freely quoted with some rather muted forecasts for the coming decade. I was in total agreement but, equally, I wasn’t looking forward to navigating through what promised to be a challenging decade.

         One thing that was clear was that the newly accepted, and widely applied, doctrine of buy and hold would be a very poor way to deal with a troubled marketplace. This turned out to be true.

         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.

 Over the life of the portfolio it has performed in the following fashion:
 

Our Portfolio Compound Returns

 

Last year	6.3% p.a.
Last 3 years	10.3% p.a.
Last 5 years	12.5% p.a.
Last 10 years	8.8% p.a.
Lifetime (27.25 years)	10.8% p.a.

 

S&P 500 Index Compound Returns

 

Last year	-5.0% p.a.
Last 3 years	5.7% p.a.
Last 5 years	10.4% p.a.
Last 10 years	3.8% p.a.
Lifetime (27.25 years)	n.a.

 
 

        The warnings of Warren Buffet and the actual experience of the S&P 500 over the last 10 years have made buy and hold investing a very poor way of compounding portfolio returns.
 
        Our approach to this environment has been pragmatic. We have adapted to the relatively profitless environment by making many more transactions than would be normal for our basic value discipline. This has resulted in a much greater turnover of the portfolio, a lot more paper :(, no change in our basic value philosophy and very respectable returns :). We expect the active trading to continue until a more normal environment returns.
 
 

c. Summary

        I am not that concerned about things we own declining in price, but I am very concerned about permanent losses. To deal with the uncertainties, I have taken the following approach, which offers the best approach to preserving our capital in any of the different scenarios.

        This is what we have and will do:
 

1. The portfolio has 34% invested in common stocks of the highest quality. The average dividend yield is 4.6% and the companies are well financed and thus not vulnerable to liquidity concerns. They are selling on average at 37% off their highs of the last 12 months so they have already suffered mightily in the market upheaval. Only a trivial amount of the portfolio is in the financial sector and none at all in banks.

2. We are still watching for system breakdown, but we are increasingly confident that, this time, we will avoid a total melt down of the financial markets.

3. I am becoming more positive about our prospects for the next few years.

4. If the world manages to muddle through this crisis (which now seems more likely) 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.  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

5. We have positions in real assets (real estate and commodities) of 5% and a 3% positions in foreign currencies and a 5% position in gold. All of these categories should move independently of any decline in the U.S. paper currency.

6.  For the first time in several years we are starting, tentatively, to dip our toes back into the water in the real estate sector (although we have always maintained a nominal position). This is not a buy signal for residential real estate and I think there is still quite a lot of pain to be experienced in that sector, but I now believe it might not be as bad as some of the direr predictions. The dramatic lowering of interest rates, although terrible for the currency and for conservative savers, should help a LOT of homeowners cope with their adjustable rate mortgages. There will still be a lot of pain, wholesale foreclosures and  distress and prices will need to revert to normal relationships viz a viz incomes, but I now believe it will be survivable without massive dislocations.

7. I am increasingly positive about the U.S. currency against most currencies except those based in Asia.
 

             As always we will remain calm and available if you wish to talk.