This is a report of portfolio performance since 1981 and also for the year to date. 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 2006 are as follows:
 

 

Portfolio Return-actual	11.1% (11.8% p.a.)
Portfolio January 1, 2006	$91.20 million
Portfolio December 8, 2006	$101.60 million
Investment earnings 2006	$10.10 million
Investment Earnings 1981-2006	$66.12 million

 
 
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
2005	8.7	3.5	5.2
Average 25 years	10.9%	3.3%	7.6%

 
 

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

        If you had invested $100,000 in the portfolio in 1981, it would have grown to $1,371,000 as of December 8, 2006 (without any further additions or withdrawals).

         I went into great detail on the minutiae of portfolio performance in the last quarterly report.
 

           Here is some more repetition, which I think is especially important this year because it has been an atypical year of returns that have approximated our 26 year average and that have also shown reassuringly steady increases. Unfortunately real life is not usually like that. :)

         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.

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

          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

  Thus far all my concerns about the fragile state of the economy have been for naught as, at least for the moment, we seem to be continuing to muddle our way through. I still believe the following general statements are accurate:
 

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.

             My approach in the last two years has been to concentrate on our usual  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. And the sky hasn’t fallen…yet.

              Our year, thus far, has been very satisfactory as the returns, which approximate market returns, have been achieved with a very conservatively invested portfolio. In other words we not only received close to market returns but we were also protected against adverse events in the economic world and the world at large. In investment jargon this suggests that we have provided significant “Alpha” which is a very desirable commodity. For anyone who is interested I can expand on this.

              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. This has always been true and will remain so in the future.

                If I could be assured of investment years like 2006, I would gladly take that guarantee for the next 25 years.
 

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

           In the last few weeks we have mailed out fourth quarter estimated tax requests to those of you who need to make payments to our wonderful tax authorities. Please look at these before year-end as some payments, for tax purposes, should be made in 2006.

            We have completed our year end tax selling, which was unusually light this year as there were very few holdings that had unrealized losses. This is, of course, good news but it does mean that your tax returns in 2006 will include quite a lot of gains, interest and dividends.

           We have purchased new offices in Falmouth and we are planning to move “home” in late January. We will send you full details of our move in the New Year – we will be located at Worcester Court close to the entrance of the Falmouth Mall. 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.