INVESTMENT PHILOSOPHY (Page 1 of 6)

Principles

Our investment approach utilizes time-tested principles of intelligent investing.  Achieving a superior investment record is a lot harder than most people think and developing investment wisdom comes from both direct experience and a willingness to absorb lessons from others.  We have been fortunate to learn from the experiences and writings of super investors such as Benjamin Graham, Warren Buffett, Charlie Munger and others.

Over time, we have identified the following enduring principles, which we judiciously apply to all of our investment efforts:

• Think about stocks as part ownership of a business.
  When we buy stocks for our unitholders, we have a mindset similar to that if we were buying into a private business.
• Maintain the proper emotional attitude.
  It is often the case that fear and greed drive stock market prices. We strive to tune out the daily noise that is swirling about and attempt to use market fluctuations to our advantage.
• Insist on a margin of safety.
  We only make purchases when we judge that the companies we are interested in are available at prices significantly below their intrinsic value.
• Do not diversify excessively.
  We believe in concentrating our holdings in a limited number of companies in the belief that we will have a chance at superior results only if we take risks intelligently. Good investment ideas are rare and when we find one, we prefer to make a significant commitment.
• Invest for the long term.
  Attempting to invest based on guessing short term swings in individual stocks or the overall stock market is not likely to produce consistently good results. Furthermore, frequent trading in stocks can have two major disadvantages: transaction costs and taxes. We believe that investment capital will grow more rapidly if the interruptions for commissions and taxes are kept to an absolute minimum.

Principles

Our investment approach utilizes time-tested principles of intelligent investing.  Achieving a superior investment record is a lot harder than most people think and developing investment wisdom comes from both direct experience and a willingness to absorb lessons from others.  We have been fortunate to learn from the experiences and writings of super investors such as Benjamin Graham, Warren Buffett, Charlie Munger and others.

Over time, we have identified the following enduring principles, which we judiciously apply to all of our investment efforts:

• Think about stocks as part ownership of a business.
  When we buy stocks for our unitholders, we have a mindset similar to that if we were buying into a private business.
• Maintain the proper emotional attitude.
  It is often the case that fear and greed drive stock market prices. We strive to tune out the daily noise that is swirling about and attempt to use market fluctuations to our advantage.
• Insist on a margin of safety.
  We only make purchases when we judge that the companies we are interested in are available at prices significantly below their intrinsic value.
• Do not diversify excessively.
  We believe in concentrating our holdings in a limited number of companies in the belief that we will have a chance at superior results only if we take risks intelligently. Good investment ideas are rare and when we find one, we prefer to make a significant commitment.
• Invest for the long term.
  Attempting to invest based on guessing short term swings in individual stocks or the overall stock market is not likely to produce consistently good results. Furthermore, frequent trading in stocks can have two major disadvantages: transaction costs and taxes. We believe that investment capital will grow more rapidly if the interruptions for commissions and taxes are kept to an absolute minimum.

Activities

The investment mandate for our two funds contains few restrictions. While this flexibility enables us to invest in any viable opportunity that presents itself, we focus primarily on the following investment categories:

• Long Term Investment Holdings
• Arbitrage and Workout Situations
• High Yield and Distressed Positions
• Fixed Income Instruments

Long Term Investment Holdings

In accumulating our investment holdings we are guided by the following criteria:

• Can we understand it?
  We fully acknowledge that we are incapable of understanding every business and its prospects. While we constantly study businesses to expand our knowledge and improve our insights over time, a key component to our success has been the ability to stay within our circle of competence in selecting investments for purchase.
• Does it possess favourable business economics?
  We look for businesses that possess a sustainable competitive advantage. Over time we have found that excellent businesses will possess most or all of the following attributes:
  • High returns on equity
  • A strong balance sheet with minimal debt
  • Attractive operating and profit margins
  • Dominant position in its industry
  • Significant brand recognition
  • Pricing power for its products
  • Growing revenues and earnings over time
  • Consistent free cash flow generation
• Does it have honest and capable management?
  Making judgments about the integrity and ability of people is an important and vital component in our approach. We want to align ourselves with principled managers of proven ability who think and act like owners. We have found over time that it pays to invest in companies where the managers have made a significant investment in the company with their own capital on the same basis as us. We also look for reasonable compensation practices and managers who are effective at deploying excess capital.
• Can it be purchased at an attractive price?
  The price you pay matters. Even the world's greatest business is not a good investment if you pay too much. An attractive purchase price creates a margin of safety in the event that a business encounters unexpected difficulties. The value of any business is equal to the net present value of all the cash it will generate for its owners over time. In practice, this value is difficult to calculate with any certainty. In making judgments about what price we can pay for an investment, we consider the ratio of price to earnings and price to free cash flow. We also compare the earnings yield of a company to that available from investment alternatives such as risk free government or high quality corporate bonds.

We strive to be disciplined in the application of our stated investment criteria to all purchase decisions. We also recognize that another key component to long term investment success is knowing when to sell opportunistically. While we agree with Warren Buffett when he says that his favourite holding period is forever, we understand that there are times when it may be appropriate to sell some or all of an investment holding in order to maximize our returns.

We will normally dispose of an investment holding in the following circumstances:

• When we deem the market price to be significantly in excess of its underlying intrinsic value.
• If we see evidence of factors that are likely to significantly lessen its sustainable competitive advantage.
• Where we believe that we have been intentionally deceived by company management either through their comments or in the financial statements.
• In circumstances where we find a new investment idea that we judge to be better than an investment holding we already own and where we have no excess capital available for deployment.

Arbitrage and Workout Situations

While our long-term investment holdings generally account for the largest portion of the capital in both of our funds, participation in arbitrage and workout situations have been a significant part of our operations.

Arbitrage and workout investing involves the pursuit of profit from an announced corporate event such as the sale, merger, recapitalization, reorganization, or liquidation of a company. Financial results from this type of investment operation depend more on a specific corporate action rather than on overall stock market behaviour. This activity features securities with a timetable where we can predict, within a reasonable probability, when we will get how much and what might prevent that from happening. Essentially, to properly evaluate an arbitrage and workout situation, we must answer four questions as follows:

• How likely is it that the promised event will indeed occur?
• How long will our capital be locked up?
• What chance is there that something still better will transpire? (An example would be the emergence of a competing takeover bid)
• What will happen if the event does not take place? (Examples would include anti-trust action or financing glitches)

We only participate in arbitrage and workout situations that have been publicly announced. Also, where possible, we attempt to reduce risk through some sort of hedge. An example of this would occur in the situation where an acquiring company is offering some form of exchange of its shares with a target company. In such a situation, we may sell short the proper ratio of shares to be received from the acquiring company in order to lock in a spread.

The gross profits from most arbitrage & workout investments are normally quite small. However, the predictability of the return coupled with a short holding period usually produces acceptable rates of return. Arbitrage and workout investing typically produces more consistent profits from year to year than our long term investment holdings because the returns are to a large extent irrespective of the course of stock market averages.

High Yield and Distressed Positions

Commitments to high yield and distressed positions have also been an important part of our investment activities over time.

High yield commitments involve purchasing a security that is meeting its interest or dividend obligations at the time of purchase and is likely to continue to do so with a reasonable probability. However, because of some perceived or actual difficulty with the company or overall market weakness, the security is available for purchase at a price that provides us with an extremely attractive annual yield. Perceived or actual difficulties affecting a company that can lead to an investment opportunity include reduced access to credit markets, poor short term operating performance, a deterioration in the value of assets or an unexpected increase in on or off balance sheet liabilities. The key consideration in any high yield commitment lies in making a determination that the company will continue to be able to meet all of its obligations over time in all likelihood.

Distressed investing involves the purchase of a security in an issuer that has already defaulted on one or more of its obligations. In these situations, the primary concern is purchasing the investment in question with enough of a margin of safety to ensure an attractive return when the issuer reorganizes its affairs, whether formally or informally. Such reorganization usually results in the issuance of a package of cash and one or more new securities to replace the defaulted obligation. A key consideration in the purchase of any distressed position is its seniority in the capital structure as senior obligations are almost always more favourably protected than junior obligations.

While our preference is to make high yield commitments because of the attractive yields generated, we believe it is important to remain flexible and consider any high yield and distressed opportunity that presents itself. As with arbitrage and workout situations, the returns from high yield and distressed positions are to a large extent irrespective of the course of stock market averages. We also believe that the ability to make commitments to high yield and distressed positions results in an improved overall discipline in allocating the capital of our two funds. Having another page in our investment playbook gives us an extended universe for attractive investment selection.

Fixed Income Instruments

 While it is our least preferred option for allocating capital in most circumstances, from time to time we find ourselves with more capital than good ideas. Rather than deploying our capital into opportunities that we would consider of inferior quality or with unfavourable risk versus reward characteristics, we will park such excess capital in various fixed income instruments, usually short term treasury bills, while we continue to search for superior return opportunities into which to allocate capital.  When holding fixed income instruments, our overriding concern is to both minimize interest rate risk and credit risk to the greatest extent possible.

Some Final Thoughts

 We have many years of experience in applying this investment philosophy for our unitholders.  We know that proper execution of this approach will lead to satisfactory results over time. That is not to say that we don't seek continuous improvement in our ability to analyze and select investments. We set incredibly high standards for ourselves and are never totally satisfied with our results. We owe our investors nothing less.