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Non-Tech : Berkshire Hathaway & Warren Buffet -- Ignore unavailable to you. Want to Upgrade?

To: 249443 who wrote (57)	7/25/2001 12:06:11 AM
From: 249443	Respond to of 240

For the 6 month period ending June 30, 2001 raveninvestment.com July 10, 2001 Dear friends, clients and fellow investors; The return on assets under management for the six months ending June 30, 2001 was 16.7%. Please refer to the table below for performance comparisons to the major indices. S&P 500 (-5.61) % TSE 300 (-12.74) % RAVEN 16.68 % It should be noted that this performance would likely not be repeated on a regular basis and I strongly urge you to temper your expectations. Such outsized returns are largely the result of both favourable opportunities presenting themselves and, such opportunities falling within my circle of competence. I have no method of foreseeing the availability of such opportunities and cannot promise that they will regularly present themselves. What I can promise, however, is that when such opportunities do present themselves, I will commit our capital vigorously. While large gains in value are welcomed, I would like to remind you of our operating motto: Capital preservation, rational analysis of pertinent facts and attainment of a reasonable return on assets are the cornerstones of our thinking. If history is any guide, our method of operation dictates that, on average, we will see larger gains during weak markets and smaller gains at the height of bull markets. This can largely be attributed to the fact that good businesses are usually only mispriced to the buyer's advantage when pessimism abounds. In a bull market, as we have recently experienced, optimism rises to irrational levels and the best businesses find themselves priced far beyond rationality. Current Market Despite what many market observers would have you believe, the recent decline in equity markets has, in general, not been nearly as bad as my estimates of the decline in their future earnings power. Many management teams have truly impaired the economic value of their companies by the actions of the past few years and the consequences of such questionable behaviour are now coming home to roost. One New York based company recently announced a $5 billion charge to its 2nd quarter earnings for obsolete inventory and the impairment of goodwill caused by two recent acquisitions. When you add up the net earnings of the company over the last decade-the total was a little over $2 billion. And it isn't getting any better yet. This does not augur well. I suspect that many more nasty surprises will be forthcoming and that, at current valuations, the average experience of investors will not be thrilling. Notwithstanding, my job is to deploy capital into investments whose managements have not demonstrated a tendency to employ the aforementioned tactics and who have demonstrated a commitment to their partners, the shareholders. Commitments Our largest commitments of capital over the last 6 months have been to businesses that by our qualifying filters proved to be above par. These businesses were purchased as their stock values fell well below what we considered rational given both their current and foreseeable economic prospects. The pessimism surrounding these businesses at that time was, in our opinion, unwarranted. Although I will not make a regular habit of discussing our holdings, I would like to give some background data regarding one of our best performing positions thus far. Liquidation World I have been following this business for over 8 years. In 1999, the company saw a huge decline in its share price because of a business deal that went sour and led to some poor financials over a few quarters. (For a good overview of the company, I recommend you read the attached article entitled: Neglected Canadian Success Story). Before I committed capital, the question I had to ask myself was: Has this business permanently impaired its earnings power and if not, is the current valuation presenting the intelligent investor with the potential for satisfactory returns? Well, we all know what I concluded based on your portfolios but what was behind the tremendous confidence (capital) I allocated to this equity? What did I see in its most basic form? Sales which had compounded at 47% over the last 13 years Net earnings which had compounded at 61% over the last 13 years Virtually debt free A huge scalable distribution network which was still growing A perpetual supply of inventory An old fashioned, conservative management team A 13 year average return on equity of 17% without leverage As for the valuation, I began buying it for your portfolios at less than the cost of its inventory. Basically, we bought the inventory and got the business and management thrown in for free. Being a rather bright guy (no chuckles, please) - I concluded that we would likely make some money under those conditions. The next 6 months Given that our largest positions have only recently begun to appreciate and are still mostly undervalued, I expect the second half of 2001 to be quite satisfactory. Our largest equity holdings are now positioned to see huge increases in reported earnings as management have taken appropriate actions to position the businesses in such a difficult period. Some positions are leveraged to the insurance industry underwriting cycle and, given the cycle is turning, I expect the market to adjust its valuation of such companies by yearend. Hopefully, my optimism shall prove warranted. Sincerely, John Zemanovich