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Solid analysis of companies and careful accumulation of underpriced stocks has the potential to yield great rewards

September 14, 2008

In this global market that looks too big for anyone or anything to bring it back to a more stable environment, I think that solid analysis of companies and careful accumulation of underpriced stocks has the potential to yield great rewards. Like the little engine that put its head down and worked at its assignment, the pursuit of fundamental research coupled with an appreciation of the consistency of human behavior should identify the securities that I believe will survive and thrive in the future. Now is the time when some of these companies are on sale.

Although no one knows precisely when, it is inevitable that these wild bargain prices will at some point in time come to a close. When that happens, and with the benefit of 20-20 hindsight, many investors will wish they had accumulated a bigger stake in these bargain companies.

Berkshire Hathaway is an example of a portfolio holding that we believe has suffered more stock price reduction than the fact pattern would suggest. We believe Berkshire continues to be a wonderful company. It is a conglomerate headed by two outstanding men with numerous diverse subsidiary businesses run by capable people. The insurance portion of their holdings is characterized not only by the clever television advertising of GEICO, but more importantly by high levels of capital strength and diversification in their lines of business. In addition, there are several successful businesses in the Berkshire lineup of companies that run the gamut from apparel to building supplies to candy to dairy desserts to energy to furniture. There is an added asset in Berkshire, which is a huge and growing pile of cash ready to acquire additional well-respected businesses, securities, and/or brand names at prices that make sense. With all of these items factored in, one wouldn’t think that the stock would have been so beaten up, yet in the first six months of this year Berkshire Hathaway fell 15.3%.

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