a. Statistics
 

      Details of the overall portfolio are as follows:
 

Portfolio Return-actual	-3.2%
Portfolio January 1, 2008	$116.5 million
Portfolio September 5, 2008	$114.20 million
Investment earnings 2008	-$3.65 million
Investment Earnings 1981-2008	$69.69 million

 

             Details of the individual years are as follows:
 

        b. Performance

        This is another one of those interim reports that I issue in times of extreme turbulence.

         I should emphasize that nothing is occurring that we haven’t previously predicted although, as is always true, the magnitude of the disturbances can never be predicted accurately. The turbulence might be quite marked, the headlines probably quite scary but we are calm and the portfolio is positioned to weather extreme disturbances. There will undoubtedly continue to be unrealized paper losses but, unlike many other participants, these losses will not be permanent.

            In the year to date the following has occurred:

       I did not repeat the longer term comparisons, which have been recorded in the most recent reports. There are several things we can take from the 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:
 

        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.

          Are we thrilled about being -3.2% in the year to date? No of course not, but we also accept that this is part of the process and also the time when we make some of our most successful investments.

 
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 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.

        I wrote this in August 2008:
 

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.

     The key question, as yet unanswered, 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 and appear to be growing.

    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.

         And now:
 

After another brief respite the turmoil in the currency markets and in the commodity sector have intensified in the last week and I suspect we will soon hear about some significant failures in this sector (a large hedge fund failed earlier this week). These sectors were the only things working in the first six months of the year and now, with the rush of money back into the U.S. $, there is widespread distress and large losses.

    The forces of deflation appear to be winning (although it seems odd to say this in a period of high oil and food prices) and the problems in real estate are by no means finished although the price adjustment is more advanced here than in the rest of the world.

    It truly has been an era of spectacularly bad financial and economic mismanagement.

           As individuals we have four key areas to be concerned about in the medium term:
 

1. Our real estate holdings will offer mediocre returns over the next 5–10 years, but they should reach breakeven over the 2006-2016 time frame.

2. Many people will experience job insecurity but, after reviewing our clientele, we are comfortable that 95% of our clients have secure employment situations. We have already talked to the small minority who might experience employment difficulties.

3. Your social security and pension payments will be made, although there might be some impairment in social security payments in the years ahead (the changes shouldn’t be significant).

4. Your portfolio is, and will remain, well managed and this should be the area, in the long run, that will cause you the least concern.

        Please don’t hesitate to call with questions. We are always available. We know times like these can be very stressful and we will endeavor to answer all your questions accurately and in full.