a. Statistics

 Details of the overall portfolio in 2005 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	3.4%	6.5%
Average 24 years	11%	3.3%	7.7%

 

B. How has the portfolio performed in  2005?

         I should reiterate that we run a balanced portfolio so it is not directly comparable to the main stock indices, but I list them because, through time, they have provided the best overall returns of any asset class. They have also been very volatile and had periods when they experienced significant losses. Our goal with the portfolio is to try to capture most, but inevitably not all, of the returns available to this asset class and, simultaneously to experience very little of the volatility that accompanies superior returns.

 The major indices have performed in the following fashion in the year to date:

C. How has the portfolio performed during it’s life (1981- 2005)?

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

         The most significant characteristic of these returns is that they were achieved with remarkably little volatility. Volatility is a measure of how much a portfolio gains or loses in a given period and, generally, the bigger the gyrations the greater the stresses felt by the investor. My goal is to make the ride as stress free as possible and also to capture most of the returns offered by the riskier and more volatile asset classes. We succeeded in doing this over the first 24 years of the life of the portfolio and it would be very pleasing if we could repeat it in the next 24 years. At that point I think retirement might look like a very viable option. :)

D. My view of the current market environment

      We have attached two pie charts, which represent the asset allocation of the portfolio on July 1st and at present. You will notice a rapid accumulation in cash and a decline in virtually all of the other asset allocations. The portfolio this summer was already conservatively positioned and in the last three months I have continued to reduce, but not of course eliminate, the degree of risk in the portfolio. This is NOT a market timing decision but, rather, it reflects the lack of sufficiently attractive opportunities in any of the main asset markets. We are quite content to hold large amounts of safe cash investments until we are presented with attractive opportunities that meet our demanding criteria.

         I wrote the following in the investment policy statement at the beginning of this year. My current comments are in bold print.

           “I was not very enthusiastic about the prospects for 2004 when I wrote the last investment policy statement in January 2004. The dangers that I saw last January have, in my opinion, significantly increased over the last year.
 
 I believe that 2005 will be exceedingly difficult for a number of reasons:

a) We are in uncharted territory with the size of our budgetary and trade deficits. The situation has deteriorated throughout the year.

b) It is difficult to find under priced assets anywhere in the world. True.

c) The risks of economic dislocation appear to be higher than at any time in my long career which spans four decades. True.

d) The potential resolutions to any of these “problems” also appear to have an unusually wide range of investment implications.

            In general I believe strongly that it is wise to enter 2005 with a fairly well diversified portfolio, which leans towards the more obvious solutions to the imbalances, but which doesn’t make any large commitments and which is flexible enough to deal with a very fluid situation. This is exactly what we have done, successfully, in 2005.

             We will also have to be patient as many actions that make sense in the medium term may look rather stupid in the short term. :)
 
  I believe that it will continue to be a difficult marketplace and one where analysis and hard work will be rewarded, if not instantly, at least in the longer term. In short, I believe that success in the near and medium term will be difficult, but possible, and that success will probably not come from the pursuit of a strategy of “buy and hold”, “S&P 500 funds” or other index strategies or, indeed, making any large % commitments to ANY asset class. “

        “My concerns about the Real Estate sector remain and, if anything, have intensified in the last nine months. I find it extremely disquieting that the development of “creative financing” for home purchases is, if anything, accelerating. This will not end well and, unfortunately, although we are not exposed directly to the real estate market we will be hard pressed to avoid the fallout. I spend a lot of time thinking, and worrying, about this issue. To put this in perspective I am worrying about the potential fallout from this bubble more than I have worried about any other economic issue in the last 25 years and that period includes the Stock debacle and crash in 2000-2 which certainly induced a lot of worry in this office”.

         We are conservative value based investors with the following attributes:

• The portfolio returns are unpredictable over shorter periods of time. We recognize that we cannot control price movements and we cannot control what will outperform in the next month or even the next year
• It is extremely unlikely that we will have significant losses and, even if we do, those losses would NOT be permanent. We expect a minority of our investments to be unsuccessful for a variety of fundamental reasons.
• We will have losing years. That is part of the process.
• It is highly likely that we will attain our longer term goals for the portfolio.
• Our investment management is carefully, and individually, integrated with our financial planning on your behalf. We maintain a diversified portfolio.