This is a report of the portfolio performance in the first nine months of 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 in 2007 are as follows:
 

    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:

             Some points are worth repeating many times (sorry, but this is true) :) as they are the key to successful value investing and, indeed, the key to virtually any successful approach to money management:
 

• The average compound returns have, easily, met our targets but there was considerable variability in the actual monthly and annual returns. This is to be expected.

• All performance should be measured based on how much risk has been taken to achieve the return. In industry parlance this is called “risk adjusted” return (see more about risk later). Our returns, on a risk adjusted basis have been superb. They have also been very pleasing on an absolute basis.

• The portfolio returns are unpredictable over shorter periods of time.

• We expect a minority of our investments to be unsuccessful for a variety of fundamental reasons.

• We will have losing months and losing years. This is normal.

• It is very unusual that we have not had a monthly portfolio decline in excess of 1% since the spring of 2004.

• We believe, but of course cannot guarantee, that we will attain our longer term goals for the portfolio. These goals, which we have comfortably exceeded over the last 26 years, form the backbone of our financial planning on your behalf.

• Our approach tends to lack excitement. O.K. It’s often downright boring. :) It is also quite uncomfortable as our portfolios will often be quite different from the “accepted norm” and probably quite different from your neighbors. The only redeeming feature is that it tends to work rather well in the long run. :)

      c.   Portfolio composition

d. Conclusions

        As you know we are still midway through my “crisis” reports that were initially triggered by the meltdown in the sub-prime mortgage in this country. It currently is calm (deceptively calm I believe) and some markets, notably the market for stocks, have recovered to their pre crisis highs. Other markets are in considerable disarray. The currency markets are in turmoil and the US $ in particular has been under attack. The precious metals markets are at multi year highs and all of the bond markets, except for the highest quality issues, remain under pressure. The biggest depressant is the housing sector and I think here we are in the midst of a multi year slump that will have far reaching consequences in this country and abroad. The good news in this country is that the prices have already fallen quite a bit and in other countries the process has barely started.

           We are still in that very difficult environment where the risks are much higher than usual and where this condition might remain in force for quite a while.  I talked about this in some detail in my report of March 20th.

         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.

         The chorus of worriers has been joined by some fairly august bodies in the last few months.

         The Bank for International Settlements is very influential and just issued the following comments as reported in the media:

         The Bank for International Settlements issued a warning this week (July) that the Federal Reserve's monetary policies have created an enormous asset bubble which could lead to another “Great Depression”. The UK Telegraph says that, “The BIS--the ultimate bank of central bankers--pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system. The IMF and the UN have issued similar warnings, but they've all been shrugged off by the Bush administration. Neither Bush nor the Federal Reserve is interested in “course correction”.
 

        (October update - since that time of course some of these areas have been under considerable pressure, but I suspect we have much more pain to come as the vast asset/credit bubble unwinds). It is quite startling to see warnings of the possibility of another “Great Depression” emanating from the Bank for International Settlements and from the International monetary fund.

         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 will 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.