>Back to top< A company's market price generally must be 60% or less of our appraisal to qualify for investment. We appraise businesses by studying financial statements, regulatory information, trade publications, and other industry and corporate data, and by talking with corporate managements, competitors and suppliers.

We use two primary methods of appraisal. The first assesses the company's liquidation value based on the current economic worth of assets and liabilities. The second method determines the company's ongoing value based on its ability to generate free cash flow after required capital expenditures and working capital needs. We calculate the present value of the projected free cash flows plus a terminal value, using a conservative discount rate. Our appraisal should represent the price that rational, independent buyers and sellers would negotiate in an arm's length sale. We then check our appraisal against our database of comparable business transactions.

>Back to top< We generally sell a portfolio holding for one of four reasons:

1. The price reaches our appraisal and no margin of safety remains.
2. We can improve our risk/return profile substantially, e.g. we can replace a business selling at 80% of its worth with an equally attractive company at 40% of its value.
3. The future earnings power of the company becomes severely impaired by threats to the business, poor capital allocation, or other reasons.
4. We no longer believe management can build shareholder value and efforts to find new corporate leadership would be unsuccessful or too costly.

>Back to top< Undervalued businesses may reach their intrinsic worth in several ways:

• Market Realization- Over time the market may recognize the business's true value. As companies with strong management and true earnings power report better earnings, the market should bid up the price of the stock.
• Mergers and Acquisitions- Undervalued companies often attract acquirors or large owners may seek a buyer. In addition, the company's management may take the company private.
• Liquidations- A company may partially liquidate its assets or operations through spin-offs of subsidiaries or sales of a portion of the business. On occasion, a company may elect to liquidate completely.
• Share Repurchase Programs- When a company's stock is undervalued, repurchasing outstanding shares can enhance shareholder value. If repurchasing shares is the capital allocation choice with the highest return, management can grow the value of the business and shrink the number of owners sharing the returns.

>Back to top< The Funds invest under the IRS diversification standard and we generally own 25 or fewer stocks in each portfolio. We hold concentrated portfolios for two main reasons. Concentration lowers our risk of losing capital because we limit the portfolios to our very best ideas, and we know the companies we own and their managements extremely well. Concentration also enables each company to have a meaningful impact on our results when the market recognizes value.

>Back to top< We are long-term owners, not traders or speculators. Our time horizon when purchasing a company is generally three to five years, which our historic portfolio turnover rate reflects. There are no limits on portfolio turnover, however, and we may sell portfolio holdings whenever we believe that sales would benefit shareholders.

>Back to top< Please examine our Risks of Investment Statement.

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