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Update - July 27th at 9:00 AM

Performance Report

This is a report of portfolio performance in 2009. The rates of return reflect the overall rate of return on all the funds that I have managed since 1981.

Statistics

Details of the overall portfolio are as follows:

Portfolio Return-actual	9.9% (18.2% p.a.)
Portfolio January 1, 2009	$110.90 million
Portfolio July 23, 2009	$128.10 million
Investment earnings 2009	$11.2 million
Investment Earnings 1981-2009	$78.6 million

The portfolio is currently invested in the following fashion:

Stock	16%
Oil	5%
Real Estate	3%
Gold	4%
VR Bonds	3%
Bonds	1%
Cash	68%
Total	100%

Discussion

There are a number of points to be made:

• The year is, extraordinarily, turning out to be a good year for the portfolio and I certainly wouldn’t have predicted that after the carnage of the first quarter. The huge infusions of liquidity seem to be re-inflating the stock market and this mini bubble is probably also a function of the unattractiveness of virtually all of the other alternatives.
• The movement in the stock market since its lows in March is certainly, for many participants, a welcome respite but, to put things in context, the markets are at levels first reached in 1997.
• We have been a heavy net seller of every type of asset (except cash) over the last month as the risks started to equal and, in some cases, exceed the potential rewards. Our cash holdings are close to record levels ($87 million) and 68% of the portfolio. This isn’t predictive of any near term market movement, but it does suggest that the plentiful bargains of the spring have largely disappeared.
• Returns on an aggregate basis in common stocks over the last 10 years have been negative.
• If the market continues to increase in value we will, in the main, not participate. It is our opinion that the increase since March (after the catastrophic year before that date) was based on defensible fundamentals and a reasonably good risk/reward ratio (i.e. our chances of a successful outcome were really quite good). It is also our opinion that any increase from this point is based on shakier ground and where the risks appear to outweigh the potential rewards.
• I will continue to manage your money using the time tested value approach that I have employed with some success over the past 28 years.
• My best case scenario is that the world economy bottoms out in the next 12 months and then makes an agonizingly slow recovery over the next few years.
• I believe only a small % of the official Government statistics as they have been, for political reasons, altered over the last 30 years (both parties are equally to blame) so that they bear little resemblance to the statistics of the period from 1920-1975. A number of thoughtful observers have been highly critical of the changes wrought on the consumer price index and the unadjusted unemployment data paints a scary picture more reminiscent of the 1930’s than the 1990’s.

Most participants in the marketplace are constrained by financial or administrative impediments. Virtually all of our competition is in the unenviable position of still being burdened by significant losses in the last 18 months and in having minimal or negative compound returns over the last decade. They desperately need “green shoots” and need to be aggressive to replace the lost funds.

We are in a very different position and we will continue to operate using a conservative value based approach. In the last five years we have witnessed a credit boom, worldwide, of epic proportions and it would be extremely unusual if we proceed smoothly into a recovery. Even the best case, at these prices, offers lukewarm long term returns and the worst case suggests a lot more pain in the months ahead.

To summarize:

• We will remain calm.
• Expect portfolio fluctuations. They are a normal part of the process. I usually respond to declines by making additional purchases.
• Our basic value methodology is unchanged.
• Our money is invested, in its entirety, in exactly the same fashion as the portfolio.

Please don’t hesitate to call if you have questions.

-Mike

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