This is a report of the portfolio performance in 2007.  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	6.6% (7.1% p.a.)
Portfolio January 1, 2007	$103.52 million
Portfolio December 6, 2007	$116.20 million
Investment earnings 2007	$7.0 million
Investment Earnings 1981-2007	$73.74 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
Average 26 years	10.9%	3.3%	7.6%

 

       
    b. How has the portfolio performed during its life (1981- 2007)?

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

      c.   Portfolio composition

 
BONDS    Domestic short term 0.0%  0%
                 Domestic long term  0.2%  0.2%
                 Domestic short sales (-0.0%)  0%
                 Domestic variable 14.1%  13.7%
                 Foreign  0.0%  0.2%
BOND TOTAL  14.3%  14.1%
 
REAL ASSETS   Gold 4.5%  4.6%
                            Commodities 5.0%  4.7%
                            Real estate 1.1%  1.6%
REAL ASSETS TOTAL  10.6%  10.9%
 
OTHER ASSETS   Arbitrage 0.2% 0.2% 0.1% 0.1%
 
CASH                     Domestic 42.8%  54.0%
                               Foreign 7.0%  6.5%
CASH TOTAL  49.8%  60.5%
TOTAL  100.0%  100.0%

      c.   Portfolio Composition

d. Commentary

        I would love to tell you that things are getting better but the truth is that the problems appear to be multiplying and so does the risk of market dislocations. I suspect that there is significant Government intervention in the bond and, probably, in the stock markets so I am viewing the strength of the last few days with a certain amount of skepticism. Here are some recent articles that are relevant.
 

   *********************************************************************************
           From the business correspondent of the Washington Post:

It's Not 1929, but It's the Biggest Mess Since, by Steven Pearlstein
Wednesday, December 5, 2007

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing, yet.What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized Debt Obligation, or CDO. CDOs are not new -- they were at the center of a boom and bust in manufacturing housing loans in the early 2000s. But in the past several years, the CDO market has exploded, fueling not only a mortgage boom but expansion of all manner of credit. By one estimate, the face value of outstanding CDOs is nearly $2 trillion.

But let's begin with the mortgage-backed CDO.

It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value.

One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose ALL their money, and even those will suffer losses of 6 to 31 percent.

And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio.

Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans.

And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.

It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

       A repeat from the last report by the CEO of Wells Fargo:

        The CEO of Wells Fargo bank said that the current real estate environment is the worst since the great depression.

        I completely agree and the confluence of factors mentioned above (the sub prime problems, the collapse of liquidity, the explosion in foreclosures etc) makes it a very difficult market for real estate. Many of the mortgage lenders have simply disappeared and the rest will employ FAR stricter methods in the months and years ahead until this debacle has been forgotten. So it will be harder to get a mortgage, reducing demand, and there will also be a huge surge of supply with the wave of foreclosures. If you add in an economy that will be, at best, shaky you are faced with very grim prospects for the real estate markets in the next couple of years. They key will be affordability and with the new stringent loan requirements the gap between price and affordability, already wide, will be daunting.

        There are two ways to bridge the gap – real incomes rise or house prices fall. Given the abysmal record of real incomes over the last 10 years (pressured by many things including the wonders of free trade and low wage competition).  I certainly know which outcome I am betting on.
 I should, once again, reiterate that I am not against real estate as an investment – just overpriced real estate. I imagine that sometime in the next 5 years we may be faced with an environment where real estate is very attractively priced and, at that time, we will be buyers.

     Here is a new report from Moody’s who tend not to be alarmist. This makes their dire predictions even more significant:

House prices seen falling 30 pct

NEW YORK (Reuters) - Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody's Economy.com said on Thursday.

On a national level, the housing market recession will continue through early 2009, said the report, co-authored by Mark Zandi, chief economist, and Celia Chen, director of housing economics.

The report paints a worsening picture of the hard-hit housing sector, which is in the midst of its worst downturn since World War II.

While activity will stabilize in 2009, it will not be until 2010 before a measurable improvement in sales, construction and pricing will emerge, the report said.

After accounting for incentives home sellers are offering buyers, effective declines peak-to-trough  through 2009 will total well over 15 percent, the report said. Punta Gorda, Florida, and Stockton, California, are the hardest hit markets in the U.S., with price declines from peak-to-trough forecast at 35.3 percent and 31.6 percent, respectively.

"This is the most severe housing recession since the post-World War II period," Zandi told Reuters.

Home sales, however, should hit a bottom in early 2008, which will mark a 40 percent drop from peak-to-trough.

"The housing market's most fundamental problem is it is awash in unsold inventory," the report said.

Moody's Economy.com, which is based in West Chester, Pennsylvania, is an independent subsidiary of Moody's Corp and provides economic research and consulting services to businesses, governments and other institutions.

     News from last week of official panic. I thought it was the province of the individual, uninformed, investor to panic?  This just can’t be good.

Run on Montana Fund
By BLOOMBERG NEWS Published: December 1, 2007

Montana school districts, cities and counties withdrew $247 million from the state’s $2.4 billion investment fund over the past three days after officials said the rating on one of the pool’s holdings was lowered to default. The fund, managed by the Montana Board of Investments, holds $90 million in Axon Financial, a structured investment vehicle, or SIV, that was cut to “D” by Standard & Poor’s amid the collapse of the subprime mortgage market.

Officials in Florida halted withdrawals from a similar fund after counties and school districts took out $13 billion, or 48 percent of assets, on disclosures the pool held defaulted debt.
 

*********************************************************************************************

e. Conclusions

         The key conclusion is that we will continue to be very cautious and aware of the unusual risks, but we will take advantage of opportunities as they occur. But we will always have an eye on the exit and we will be even more demanding when we evaluate our purchase candidates.

           I wrote this in the early fall, but it is worth repetition:

 
         We are still talking about possibilities here and not probabilities, but the possibility is too significant to ignore. Our goal is to shepherd you through the good times and bad and to make sure that any risks taken have manageable losses as a potential worse case outcome. Many people discovered the problems with a riskier portfolio in the high technology boom of 1998-2000 and in the real estate boom of 2003-6. Losses in these kinds of situations are devastating, life changing and can be permanent.

     This will mean that in years like this we may lag the market as a penalty for the risk averse nature of our portfolio. This is a penalty we are happy to pay as we want to survive and prosper in the long run and we have seen numerous instances of fortunes won and lost. That is not our way.

         We truly do believe, and the evidence supports us, that “Slow and steady wins the race”.  As always we are here for your questions and we really enjoy all of your visits – both planned and impromptu.