How We Think

Making Disciplined Allocation Decisions

The year 2008 was difficult for virtually every asset class.  Our results would have been significantly better if we had had the foresight to simply hold cash.  We were not that prescient, but our policy of simply ignoring companies that we do not understand, use too much leverage, have weak management, or do not have any competitive advantage we can identify (“invert, always invert”) means that we did not own any banks, brokers, automakers or any other highly-levered companies that have gone or may soon go bankrupt.  The shares of some of the companies that the fund owns have been marked down to fire-sale prices as fear has taken hold.  We liquidated several positions and added one new major position in the fourth quarter.  We liked the positions that we liquidated, but the reality was that the market offered some even more attractive values.  We sold a sizeable stake in one of the world’s most successful retailers to buy into arguably the world’s best consumer products company through two different securities.  Of course, we do not know if the prices for assets will decline materially in the short term from these levels.

We put little stock in our ability to predict when either the economy or the market will turn around, but our lack of leverage and stable of quality businesses give us the liberty to wait.  And just as importantly, because we own quality businesses, we expect that the fund will both avoid permanent capital loss and earn an acceptable return when the market begins to recognize the intrinsic value of our holdings.  We suspect the returns from holding equity securities in general will be more than satisfactory over the next 20 years from these levels.  We hope our investing discipline will allow us to do somewhat better than the market generally over that period.  We always prefer the S&P 500 to go down as we intend to be a net buyer of stocks for years to come.  Lower prices generally will allow each dollar invested to own a larger percentage of the world’s earning power.