A. Statistics

           Details of the overall portfolio in 2006 are as follows:
 

Details of the individual years are as follows:

 B. How has the portfolio performed during its life (1981- 2006)?

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

 I went into great detail on the minutiae of portfolio performance in the last quarterly report. 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 tend to be quite satisfactory but there is considerable variability in the actual monthly and annual returns.
 
• This data suggests that, as a normal part of the process, the portfolio will decline in value between 25–30% of the time. This does not, incidentally, preclude a whole series of negative months.

• 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.

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

• We will have losing years.

• We believe, but of course cannot guarantee, that we will attain our longer term goals for the portfolio.

• We will often buy unpopular companies in unpopular industries when the consensus would suggest our investment is unwise or premature. We, equally, will never participate in overvalued markets and manias. Those are temporary profits that we are more than willing to forgo.

• Our investment management is carefully, and individually, integrated with our financial planning on your behalf. We maintain a diversified portfolio.

        It is strange that many of the key points listed above seem, at first glance, to be negative and often downright gloomy. But in reality they just represent the normal process of value investing and in numerous studies value investing has been shown to be best approach to the long term management of funds. I, and others, believe it succeeds partly because it lacks glamour and excitement and because it is often boring and involves investments in unpopular securities and obscure instruments. Most investments on the retail side are still sold rather than bought and consequently must have a “hook” or sex appeal to secure a sale. It is pretty hard to imagine anyone being excited about our typically obscure and frequently complicated purchases. :)

           The Securities and Exchange Commission in their recent review reminded me that I should be careful in making “forward looking statements” i.e. comments about my expectations for the portfolio in the future. In the past I have always tried to be very careful in this regard by being circumspect in my statements. Here for their benefit is my standard disclaimer “Past performance is no guarantee of future successes”.

          The future offers no guarantees but we will use the same relatively risk averse methodology that has served us well over the last quarter century. I suspect the next 25 years will be difficult, perhaps much more difficult than many of us expect, and my goal is to achieve a rate of return that exceeds the ongoing rate of inflation by 5% p.a. (this is the base on which all our planning is built) and, more significantly to avoid major future financial disruptions.

C.   The Year Ahead

        I am afraid this is more repetition of what I have written in previous reports over the past 12 months. I have been increasingly concerned about the growing dangers that I perceive in the world economy. The highlights of my comments were:
 

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

b) The potential resolutions to any of these “problems” (trade dislocations, housing bubbles, currency problems) also appear to have an unusually wide range of investment implications.
 
 

        Our year, thus far, has been quite satisfactory as the returns have been achieved with a very conservatively invested portfolio. As winter approaches the portfolio has a record low % in common stocks and a record high % in cash equivalents. This is a reflection of the lack of attractive opportunities that currently exist in most asset markets. I will not invest our hard earned money unless the odds of a successful outcome are significantly in our favor.
 

D.  Summary
 
           We appreciate the trust you have placed in us and we realize the responsibility and take it VERY seriously.

           We are looking at several properties in Falmouth and we may well, in our next report, have news of a move “home”.  We have spent many happy years at the Mashpee office, but now it makes sense, on many levels, to move closer to our homes.

         Please call if you have any questions or concerns. We are always available and are happy to talk, answer questions and, hopefully, to provide useful advice.