This is another of those occasional updates that I issue as a supplement to the individual performance reports, investment policy statements and financial planning reports.

 
     The rates of return reflect the overall rate of return on all the funds that I have managed since 1981.
 

a. Current Performance

          b. Portfolio News
 
        The portfolio has been in existence since May of 1981. We are in our 24th year. In the years since 1981 we have compounded the wealth of our clients at 10.9% p.a. The details of the individual annual returns are provided in our quarterly and annual returns and, of course, are recorded on our web site.
 

           The real rate of return we have achieved (7.6% p.a.) compares very favorably with the long term returns available for the riskiest portfolios and, most importantly, we have achieved these returns without incurring significant risk. Our planning is based on the achievement of a real rate of return of 5% p.a. and we believe that this is achievable in the years ahead with the same approach that we have employed over the last 24 years (i.e. a sensible, risk averse and value based approach).
 

c. Financial Planning

d. Taxation

 Traditionally in the 4th quarter we try to “harvest” our tax losses by executing tax motivated stock sales. The goal with tax loss selling is to reduce your taxable realized gains and, therefore, reduce your tax bill. My best guess, at this point, is that our tax loss selling this year will be fairly light as we are in the happy (?) position of having very few unrealized losses.

           If you are over 70½, and you have accumulations in I.R.A, Keogh and tax sheltered annuity accounts, you have to make a mandatory minimum withdrawal each year. You will receive a letter from us at the end of November with complete instructions regarding the withdrawal. If you do not receive a letter this means that no extra withdrawals are required and this is usually because you have already met your annual minimum requirement.
 

e. Are the markets efficient?

            There was a very influential academic theory, now widely discredited, that the market at any given moment was rational and that the prices of assets reflected, essentially, the real worth of any asset at any given point in time. I always thought that was nonsense, at least in all of the marketplaces that I inhabited, although I do believe it has some validity in a few markets that are simple and that are subject to limited variables. Nice theory, but totally useless in the real world. :)

              Ben Graham wrote about this at some length in his master work “The Intelligent Investor” and I still recommend that book as, probably, the best book ever written about investing.

          An understanding of Graham and his discussion of “Mr. Market” gives any investor an amazing advantage in the daily struggle to preserve, protect and grow their wealth. The main concept is very simple – the market is totally irrational and is constantly overpricing or underpricing assets in every marketplace. The key thing to remember, and it is surprisingly difficult to remember in times of crisis, is that the price of a security at any given moment does NOT represent its true value. Most participants in the marketplace don’t view the world this way and take their reality from the market price and how much it has gone up or down over a given period of time. This is very much like getting one’s main investment counsel from a certifiable lunatic (I have stolen this term from Jason Zweig who edited, and contributed heavily, to the latest version of “The Intelligent Investor”).

           A typical value investor takes their view of reality from their assessment of the real underlying value of the security that they own, which they obtain by a careful and conservative appraisal of the finances and the business. A typical investor, and they outnumber us by probably a factor of 100 to 1, takes their view of reality, or at least a significant part of it, from the price movement of a security. This is also true for the majority of professionals in this business not, thankfully, because they believe in the primacy of price, but because they are forced to by the pressures to conform and outperform in the short term.

           A conservative value investor:

1. They sell to optimists and buy from pessimists.

2. They recognize that you cannot control price movements and you cannot control what will outperform in the next month or even the next year.

3. They can, however, control what they buy and what they are willing to pay.

4. They expect a minority of their investments to be unsuccessful for a variety of fundamental reasons.

5. They maintain a diversified portfolio.

6. They know that eventually they will control the entire wealth of the world. ?

f. Conclusion

 
         My usual conclusion is worth repeating because this information, and its acceptance and understanding, is critical to our long term success:
 

• The portfolio returns are unpredictable over shorter periods of time.
• It is extremely unlikely that we will have significant losses and, even if we do, those losses would NOT be permanent.
• 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.