report081208

Supplemental Report- August 12, 2008

This is a report of the portfolio performance thus far in 2008. The rates of return reflect the overall rate of return on all the funds that I have managed since 1981.

a. Statistics

Details of the overall portfolio are as follows:

Portfolio Return-actual	-0.2%
Portfolio January 1, 2008	$116.5 million
Portfolio August 12, 2008	$117.20 million
Investment earnings 2008	-$0.25 million
Investment Earnings 1981-2008	$73.09 million

Details of the individual years are as follows:

Year	Rate of Return	Inflation	Real Rate of Return
1981	15.0%	8.0%	7.0%
1982	15.4	3.0	12.4
1983	16.0	4.0	12.0
1984	9.8	4.0	5.8
1985	18.3	4.0	14.3
1986	13.8	1.5	12.3
1987	9.7	4.0	5.7
1988	18.0	4.0	14.0
1989	10.7	4.5	6.2
1990	0.7	6.0	-5.3
1991	14.9	3.1	11.8
1992	10.0	3.0	7.0
1993	13.7	2.6	11.1
1994	0.3	2.7	-2.4
1995	13.2	2.7	10.5
1996	15.5	3.0	12.5
1997	6.9	1.8	5.1
1998	-4.5	1.5	-6.0
1999	-2.3	2.5	-4.8
2000	15.3	3.3	12.0
2001	19.2	1.5	17.7
2002	-0.6	1.5	-2.1
2003	25.2	2.2	23.0
2004	9.9	3.3	6.6
2005	8.7	3.5	5.2
2006	11.7	2.0	9.7
2007	6.2	4.3	1.9
Average 27 years	10.7%	3.3%	7.4%

B. Performance

Over the life of the portfolio it has performed in the following fashion (data as of July 2008): Our Portfolio Compound Returns

Last Year	2.0% p.a.
Last Three Years	9.8% p.a.
Last Five Years	12.3% p.a.
Last 10 Years	8.8% p.a.
Lifetime (27.25 years)	10.8% p.a.

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.

S&P 500 Index Compound Returns

Last Year	-11.0% p.a.
Last Three Years	4.7% p.a.
Last Five Years	9.4% p.a.
Last 10 Years	3.8% p.a.
Lifetime (27.25 years)	n.a.

There are several things we can take from this data. We have every reason to be very pleased with what we have achieved over the last quarter of a century and especially pleased at the lack of volatility exhibited by our portfolio. In our worst year, 1998, the portfolio declined by 4.5%. By way of contrast the S&P had the following negative returns:

2000	-9.1%
2001	-12%
2002	-22%
2008	-11.7% (YTD)

Now that is volatility. Compounded returns are fine as a concept but few people could withstand the 2000-2 decline of 43% without permanently changing their future behavior. It takes a very large increase to break even in those circumstances and, in reality, most people bail out way before that point occurs.

We are, of course, focused on absolute rather than relative returns, but we can be pleased on both counts i.e. that our relative returns have been very good but, more importantly, 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. Current Situation

I wrote this in the annual report for 2007:

“This past year, as was well documented, was the most challenging year that the investment markets have experienced in many years. It had many twists and turns, many traps and enough volatility to please the most enthusiastic casino patron.”

I wrote this in the first quarter of 2008:

“I expect to see additional turmoil and uncertainty throughout the year with the continuation of the crises that have roiled the bond, housing, currency and stock markets. The outcomes are unknown, but I will continue to use all my experience and caution as I attempt to navigate these tricky waters. We still have a very conservative posture, but it is not risk free. I believe it offers the best combination of potential gain coupled with the absence of financially life threatening risk. I think most professional portfolios, as currently constituted still have unacceptably high levels of risk IF some of the more dramatic scenarios unfold.

I wrote this in June 2008:

Well here we are, six months later and, after a brief respite, the clouds are darkening again. Everything I wrote about in the paragraphs above remains true.

The month of June was the worst June in the markets since 1930. The first half of 2008 was the worst first half in the equity markets since 1970.

We are now in August and I would like to report that things are getting better but, actually, things are once again declining and it is now much more of a worldwide phenomenon. The real estate crisis has spread far and wide with distress in such diverse arenas as Australia, Spain, England and Ireland. I suspect in at least some of those places that the pain will be more severe than our domestic travails.

It seems that Europe is sinking into recession and England won’t be too far behind and it appears that the United States is already in recession. I think it probable that much of the world will follow and the key question, as yet unknown, is whether a global recession with a weakened banking system will degenerate into something much worse. The jury is out on that one, but the risks are very real.

The few things that have been working well this year – investment in foreign currencies; resources - oil and, of course, gold – have all suffered savage corrections (bear markets) in the last two months.

It has been the most challenging investment environment in my lifetime and I’m still not quite sure how I have managed to stay at breakeven in the face of all this carnage. I put it down to age, experience, skill and a little good fortune.

Please call with questions. We are always available. PORTFOLIO DIVERSIFICATION

	January 21	August 12
Stocks	30%	29%
Energy	3%	7%
Real Estate	3%	4%
Gold	5%	5%
Variable Rate Bonds	14%	8%
Foreign Cash	6%	4%
Cash	39%	43%
TOTAL	100%	100%

As you can see the portfolio is still diversified and risk averse. A point of reminder that the regular statements we send to accompany the bill have only limited asset categories (equities, cash and bonds) so they tend to wildly overstate the equity positions. The breakdowns above are accurate and your individual portfolios will have diversification in a similar, but not identical, range i.e. your stocks might be 35%, but they certainly won’t be 55% of the portfolio.

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