a. Statistics
 

      Details of the overall portfolio are as follows:
 

Portfolio Return-actual	-10.3%
Portfolio January 1, 2008	$116.5 million
Portfolio December 1, 2008	$105.7 million
Investment earnings 2008	-$12.2 million
Investment Earnings 1981-2008	$61.14 million

 

          I have compared our portfolio versus a combination of the major market indices – the Nasdaq and the S&P 500 indices. I have also compared them with the “best of class” value investors – Third Avenue and Longleaf. The latter is a pertinent comparison as it is my strong belief, based on a lot of data, that the value approach offers the best long term return in the stock category. The stock category in the long term is, by a wide margin, the best performing asset class.
 

*       % is rounded to the nearest number.
**       The 3, 5 and 10 year figures are for compounded returns.

           I have also appended the chart for longer term performance since 1981. This carries several very important messages. The current decline, at least for us, is placed in perspective and, more importantly, we have consistently in the medium term exceeded our targets, which are the cornerstone of our financial planning on your behalf.

        We are, in 2008, in uncharted waters and nothing in the past can prepare anyone for all of the challenges we have faced in the last year and that we will face in the year ahead.  The need for an active portfolio has never been more apparent than in 2008 and I apologize for the heavy volume of transactions but they have been both necessary and beneficial.

         There have only been two safe places in 2008 and they have been treasury bonds and cash (although even the latter has suffered in debacles in some near cash investments). We have close to 50% of our portfolio in cash investments, primarily short-term Treasuries.

          I have the very strong belief that U.S. denominated cash assets or Treasury bonds will be, in the medium term, extremely poor investments. The latter will almost certainly provide negative returns and it seems quite probable that the former will offer negative real returns.

           The only assets that are attractive in the near and medium term are:
 

• Gold and, to a lesser extent, silver
• Well financed large corporations of high quality and in recession resistant industries with manageable debt loads and selling at historically low prices.

CONCLUSION

        In the days and months ahead, I think it is reasonable to expect a continuation of the extreme volatility and chaotic market conditions. I appreciate all your support in these trying times. As you know I expected this chaos as the housing bubble burst, but even I am surprised at the extent of the damage and the ongoing carnage.  I expect a continuation of the heavy portfolio activity.

        I started to include quotes and pieces from sources that I have accumulated, but I realize they can be boiled down to a few sentences.
 

• It seems probable that we will have either a very severe recession or a controlled depression.
• The real estate market is much worse than everyone realizes– approximately 1 in 4 mortgages exceed the value of the underlying house.
• The coming debacle in commercial real estate will be quite traumatic.
• The names of the Financial giants that have disappeared (or experienced humiliating rescues) in 2008 represents a “Who’s Who” of American finance.
• The volatility in the marketplace is unprecedented in its severity.

        It will not be easy and the portfolio values will, probably, continue to fluctuate significantly. The volatility will frequently be beneficial for us and lower prices are nearly always beneficial.  I do realize that volatility is stressful and that the chaos often hits the nightly news (although they usually miss the key points). :)

        We will remain calm. Please call with questions.