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

         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.  Since the Last Report

           My last report offered a glimmer of hope that, perhaps, we were over the period of greatest danger, but events of recent weeks suggest that we are once again in a period of significant danger.
 
           The markets have been, in a word, vile and we have not been immune to the savaging that has occurred. Although painful, in the context of the markets, our pain has been muted. The data is as follows:
 

        That is what has happened in the broader domestic stock market. Overseas markets have been no safe haven with general declines led by a massive decline of 45% in the Shanghai market since last October.

           It seems fairly obvious that we are already in a recession, that inflation is worsening, the real estate market is in absolute disarray, the pressures in the financial markets are once again increasing and the domestic consumer is in serious trouble.

          I wrote this last time   “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.”

         As I said above the risk of an extreme dislocation is no longer receding and there have been disquieting events in recent weeks including more distress in the financial sector.

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

        The best proxy for an investment in the stock market is an index measuring the S&P 500 index. Stocks are the best performing asset class through time AND the most volatile.

 

Last year	-11.0% p.a.
Last 3 years	4.7% p.a.
Last 5 years	9.4% p.a.
Last 10 years	3.8% p.a.
Lifetime (27.25 years)	n.a.

 
 

         We are, of course, focused on absolute rather than relative returns, but we can be pleased on both counts i.e. that our absolute returns have also comfortably exceeded our targets.

         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 wrote this in the last report “I am not that concerned about things we own declining in price, but I am very concerned about permanent losses.”
 
        In the nasty declines of the last six weeks we have slipped into the negative column as the markets in general have been extremely weak. I wouldn’t be at all surprised if the weakness persisted and expanded.

        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 5.0% and the companies are well financed and thus not vulnerable to liquidity concerns. They are selling on average at 39% 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. This is, for the first time in my lifetime, a real concern. Although it is a real concern it is important to realize it is a relatively low probability concern.

3. I am becoming more positive about our prospects for the next few years. The postitivity is based on the cheapness of the high quality assets that we are purchasing in the portfolio.

4. 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.  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. The smart approach, which we always adopt, is to buy things when they are cheap in good markets and in bad markets. We know that timing the markets in general is impossible and that it is a fool’s game. The interesting thing at this point in time is that some things are dangerous or face poor odds (most real estate, certificates of deposit, bonds of most types, commodities (probably), financial sector securities). Some things are mediocre, but safe (treasury bills, short term obligation of foreign governments). Only one sector appears to be reasonably priced and that is the very large capitalization stocks around the world. I am buying them at historically low levels with a combined yield of 5%. Are they still falling in price? Yes. What is my general reaction to that? Buying more up to my limits i.e. no more than 4% in one security.

    Office Notes

        We have hired an intern for the summer to help us catch up on some projects. Kim Doherty (Mike's neighbor) started today and she will be here until school starts in the fall. She has taken the place of her sister Kelly who worked here for the past three years.

        As always we will remain calm and available if you wish to talk. It WILL be a bumpy ride.
 

              Mike   June 23 2008    8.00 am.