November 2009

Sideways
Forget about bull and bear markets and tune
into what Mr. Market is telling you
Red sky at night, sailors delight,
Red sky at morning, sailors take warning. Inside This Issue
The old sailor’s rhyme is quaint, but true.
If you see red sky in the west as the sun sets, a storm is moving • Red Sky at Morning,
away from you. If the eastern sky is red as the sun rises, look out – Investors Take Warning
trouble is coming your way. • A Radical New View of the
The rhyme holds true as a weather forecasting tool because of the Stock Market
way storms move through the atmosphere. That’s what the red sky is:
• Microsoft Eats 30 Years of
moisture and particles in the atmosphere, a possible storm system in
Uncle Sam’s Lunch
the distance.
• Practicing "Assiduity"
A version of the rhyme has been around for thousands of years.
The biblical version appears in the book of Matthew. Jesus is criticiz- • Credit Ratings 101
ing the Pharisees and says, “O ye hypocrites, ye can discern the face of
the sky; but can ye not discern the signs of the times?” ____________________
Investors are like that sometimes, too. They’re wrapped up in pre- Editor: Dan Ferris
dicting the next bull or bear market. They don’t ask whether stocks –
which are just pieces of business after all – are priced for an adequate
return or not. (It’s “not” these days.) Like the Pharisees in the book of Matthew, investors try to discern the face
of the sky, but can’t discern the signs of the times.
I want to give you a tool, a way of looking at the overall market that will hopefully supplant the ubiquitous
bad habit of trying to predict whether it’ll go up or down in the next few days, weeks, or months.
I’ve found what I believe is the best way to establish a rational expectation about stock valuations over the next
five to 10 years. If you stick with this tool and forget about predicting the market’s ups and downs, you’ll do much bet-
ter than the traders likely to get whipsawed badly in the next few years.
You’ll find the tool on page 2, in my version of a graph created by Kevin Tuttle of Tuttle Asset
Management. I found the original graph in a presentation by my friend Vitaliy Katsenelson of Denver-based
Investment Management Associates. Vitaliy wrote a book called Active Value Investing, and he’s the one who first
told me about IMS Health (NYSE: RX)... so we owe him one!
The chart doesn’t show you bull and bear markets… It shows you all the bull markets and sideways markets
from 1900 to 2006. (Nevermind the bear market of 1929-1932. It’s the exception to the historical rule.)

1
 Forget about bear markets. And forget about bull mar-
kets for several years. The only rational expectation for the
next several years is a sideways market, just like the ones
you can plainly see between every bull market on the chart.
On the bottom of the chart, you’ll find changes in the
price-to-earnings ratio of the market. Notice how the valua-
tions fall over the life of a sideways market. Take a look at
any one of the sideways markets on the top chart and match
it up with the P/E ratio chart at the bottom. You’ll see
stocks starting out very expensive and ending up very cheap.
Stocks usually start going sideways at or above 20
times earnings. Sideways markets usually finish with
stocks at or below 10 times earnings. The 100-year aver-
age P/E ratio of the S&P 500 is 16, about in the middle
of the sideways market’s general range. Right now, there’s
little doubt about what’s happening. The entire U.S. mar-
ket is trading at 29 times earnings. We’re nowhere near
the end of this sideways market.
So if you must obsess about the market, now you
know how to do it. Forget about momentum. It’ll kill you
in a sideways market. You’ll always be selling when you
should be buying and vice versa. Focus on the overall
market’s valuation, not its direction. That’ll give you an
advantage over the momentum crowd.
Stocks have been going sideways since 2000. Back
then, stocks reached their most expensive valuation ever,
up around 40 times earnings. I believe there’s a good
chance you’ll see the overall stock market get cheaper than
Extreme Value
anytime in history before the current sideways market
comes to an end.
Markets tend to swing like a pendulum. When they
swing too far in one direction, they swing about that far
in the opposite direction. The pendulum never swung as
high in the bull market direction as it did back in 2000.
It ought to correct about that far in the opposite direc-
tion. So maybe we’ll see stocks down around five or six
times earnings in five or 10 years. Perhaps the Dow Jones
Industrials will yield somewhere around 8%-10%. Again,
I’m not trying to make specific predictions. I’m trying to
adjust your expectations away from the bullish standards
of the past and toward the new, more pessimistic reality of
the sideways market.
The bull is gone. The bear is irrelevant. The “coward-
ly lion” is here.
Until the sideways market finally ends and valuations
stop falling, I expect we’ll find the occasional gem like
IMS Health, trading around five times free cash flow
when we recommended it in August. It’s a one-of-a-kind
business. It tracks 90% of all the prescription drug trans-
actions in the country. It has 50 years worth of data, mak-
ing it virtually impossible to compete with. It is the gold
standard in its industry, the World Dominator.
Not at all surprisingly, IMS Health is the target of a
buyout. At $22 a share, the offer is about 70% above our
initial reference price, just under $13 a share. I think $22
is way too cheap. If this deal had been done three years
2 Volume 8, Issue 3, November 2009
ago, you’d have made an easy 100% buying at $13 a
share. But that’s life in a sideways market. Even when the
overall market’s valuations get lofty, there’s still pessimism
in the air. We’re lucky to have made as much profit as we
did as quickly as we did.
Looking ahead, I think either the current buyout deal
will go through at $22, or a bidding war will start, which
will ratchet our exit price even higher. I see little risk the
current all-cash offer by Texas Pacific Group will fall
through. IMS’s free cash flows will cover – with room to
spare – the interest charges on the debt needed to do the
deal. For now, HOLD IMS Health (NYSE: RX).
Don’t Get Whipsawed in the
New Sideways Market
Let’s get another aspect of this study of sideways mar-
kets out of the way. Saying the market will continue to go
sideways doesn’t mean I have any idea what the limits of
the trading range will be.
So I’m not predicting a market crash. The Dow and
the S&P 500 could make new all-time highs for all any-
one knows. I can’t possibly know how high or low the
market will go on its sideways journey. I didn’t show you
the historical phenomenon of sideways markets so you
can try to guess when the market has hit the top or bot-
tom of a trading range. I don’t do trading ranges… and
neither do you if you like holding on to your money.
Momentum traders who rely on the confirmation of
an established trend will get whipsawed badly over the
next several years. Right when they think the trend is con-
firmed, it’ll either go sideways on them or reverse.
Momentum trading is a horrible idea in sideways markets,
at least if you’re trying to catch the big trends. The big
trend for the next several years will be sideways. Trade at
your own peril.
For value investors, “buy low” and “sell high” doesn’t
refer to the up and down movements on price graphs. We
buy low and sell high based on price in relation to the
intrinsic value of the individual business in question.
IMS Health is a great example. When we bought it
in August, the market was already way up and very expen-
sive. We weren’t buying based on anything having to do
with the overall market’s movement or its valuation.
Rather, we bought IMS Health because the stock got
cheap relative to its large, steady earnings stream. IMS
Volume 8, Issue 3, November 2009
Health was “low” in relation to the value of its future
earnings. The overall level and price action of the market
had nothing to do with it.
We don’t buy and sell based on the value or direction
of the overall market. We notice that good ideas get
extraordinarily scarce when the valuation is high and
come out of the woodwork when it is low. But we are
always and only bottom-up, one-stock-at-a-time investors.
We buy only when the price of a good business is low
enough relative to its reasonably ascertainable intrinsic
value. And we sell when a stock ceases to become safe or
sufficiently cheap. That’s how we do it now, and that’s
how we’ll always do it.
Never, ever forget that our lodestone, the single guiding
light of all our investment activities, is the idea of intrinsic
value. It’s hard to remember this. It’s nearly impossible to
do financial research without being bombarded with stock
quotes, technical data about price movements, trading
systems, and all other manner of data points and advice
schemes, each of which some talking head on CNBC
seems to think is of the utmost importance and must be
followed minute-by-minute. It’s all a giant distraction,
making it hard to focus on the idea of intrinsic value.
Fortunately, the difficulty most people have focusing
on this all-important concept is what makes it so much
more valuable than it ought to be.
It’s a rare investor who doesn’t obsess about stock
price movements and is instead obsessed with learning to
analyze and value businesses. Everybody wants to be Jesse
Livermore, the legendary trader (who went broke eight
times and committed suicide). Nobody wants to be
Warren Buffett, the world’s greatest investor (who was
briefly the richest man in the world).
So much the better for us. We’re practically guaranteed
an ongoing supply of opportunities (though at the
moment, we’re waiting for them to show up). Until stocks
Published by Stansberry & Associates Investment Research
Dan Ferris, Editor
Brian Hunt, Editor in Chief
Cadie Palmer, Graphic Designer
Visit our website at: www.stansberryresearch.com
1217 St. Paul Street, Baltimore, MD 21202 888-261-2693
LEGAL DISCLAIMER: This work is based on SEC filings, current events, interviews, corporate press releases and
what we've learned as financial journalists. It may contain errors and you shouldn't make any investment decision
based solely on what you read here. It's your money and your responsibility. Stansberry and Associates
Investment Research expressly forbids its writers from having a financial interest in any security they recommend
to our subscribers. And all Stansberry & Associates Investment Research (and affiliated companies) employees
and agents must wait 24 hours after an initial trade recommendation is published on the Internet, or 72 hours
after a direct mail publication is sent, before acting on that recommendation.
3 Extreme Value
do get cheap enough or until it becomes time to sell the
stocks you own, you need to practice what Charlie Munger,
vice chairman of Berkshire Hathaway, calls “assiduity.”
If you look that word up in the dictionary, it’ll say
something like “great care and attention in doing some-
thing.” That’s good, but it’s not what Munger means.
Munger means that to make any money on your stocks
and if you want to avoid making bad investments when
stocks are expensive, you need to learn to sit on your ass
and do nothing.
That’s assiduity, and that’s what you need to practice
right now.
The World’s Safest Credit Is Also
the World’s Cheapest Stock… Even
Though It’s Up 58% the Past Year
The safest credit among publicly traded U.S. compa-
nies is Microsoft (Nasdaq: MSFT).
Why engage in hyperbole, you may ask, when
Berkshire Hathaway, for just one of many examples, is in
possession of billions more in liquid assets than
Microsoft? Because Egan-Jones Credit Ratings, the only
credit-ratings agency that’s worth anything, rates one and
only one company triple-A, the highest credit rating of
all: Microsoft.
The report in which Egan-Jones initiated coverage of
Microsoft at the triple-A rating, dated May 11, 2009,
reads nonchalantly, “MSFT’s market capitalization is
$174B providing plenty of coverage… We are initiating
coverage with a ‘AAA’ rating.” Sounds like Joe Friday.
Well, Joe, the facts and just the facts have become
even more attractive since May. Today, Microsoft sports a
$260 billion market cap, providing plenty more equity
coverage for unsecured creditors.
You see, equity is the buffer between creditors and
bad times. I promise you, $260 billion is a big damn
buffer. It’s like protecting an egg by putting it three miles
underground and surrounding it on all sides with a 100-
foot-thick concrete shell. There is basically zero credit risk
in lending money to Microsoft.
The market agrees with my assessment, pushing the
market value of Microsoft’s $3.75 billion of recently mint-
ed long-term debt above the principal value. Microsoft
issued the new debt around the time of Egan-Jones’ report,
Extreme Value
Credit Ratings 101
Ever wonder what is meant by “triple-A,” “triple-B,”
“investment grade,” or “junk” ratings?
Well, there’s one, fairly simple criterion that makes all
the difference when it comes to credit ratings. Just look
at the difference in Egan-Jones Ratings Agency’s defini-
tions of triple-A and triple-B (the latter being the lowest
so-called “investment grade” credit rating):
AAA: An obligation rated ‘AAA’ has the highest
rating assigned by Egan-Jones’s. The obligor’s capac-
ity to meet its financial commitment on the obliga-
tion is extremely strong.
BBB: an obligation rated ‘BBB’ exhibits adequate
protection parameters. However, adverse economic
conditions or changing circumstances are more like-
ly to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
As you can clearly see, there’s no mention whatsoever
of “adverse economic conditions or changing circum-
stances” in the triple-A definition. In fact, it doesn’t
show up in the double-A definition, either. It makes its
first appearance in the A definition, and in all the defi-
nitions beneath that.
In other words, companies rated triple-A or double-A
are so strong, they can weather most any economic storm
with little damage to their business. All other companies
are by definition at least slightly more vulnerable to
adverse economic conditions than the top ratings.
“Investment grade” ratings are those rated triple-B
and higher. Junk or speculative-grade ratings are double-
B and lower. I tend to think of investment grade as A
and higher, since triple-B is just one notch away from a
junk or speculative rating. Moody’s did a study once that
showed the default rate for A-rated bonds was 0.1% over
the period from 1983 to 2001. The default rate for all
other ratings during that period was an astounding 55%.
What does it mean? It means that, when you see a
company rated triple-A or double-A, you’re looking at
one of the strongest financial powerhouses on Earth.
So when you hear bad economic news on the TV,
radio, or Internet, you can remember in the back of
(continued on following page...)
4 Volume 8, Issue 3, November 2009

your mind that companies rated triple-A or double-A
will fare much better through whatever changes there are
than companies with lower credit ratings.
Below are Egan-Jones’ ratings for our World
Dominator stocks. Note the preponderance of double-
As, plus the only triple-A. These are the most financial-
ly healthy – and therefore creditworthy – companies in
the world.
Wal-Mart (NYSE: WMT) A+
ExxonMobil (NYSE: XOM) AA+
Automatic Data Proc. (NYSE: ADP) Not rated
United Parcel Service (NYSE: UPS) BBB+
Procter & Gamble (NYSE: PG) AA-
Microsoft (Nasdaq: MSFT) AAA
Berkshire Hathaway (NYSE: BRK-A) AA
Intel Corporation (Nasdaq: INTC) AA
divvied up thus: $2 billion at 2.95% interest due 2014, $1
billion at 4.2% interest due 2019, and $750 million at
5.2% notes due 2039. So that’s five-, 10- and 30-year
debt, all at tiny spreads over low-yielding Treasuries.
Microsoft’s total annual interest payments of approxi-
mately $100 million amount to about 2.7% of the total
outstanding principal amount. You only get money that
cheap if you’re so financially strong you don’t need it. If
you use the market value of the debt, which is higher than
the actual principal, Microsoft’s debt looks cheaper still.
The market sees zero risk in Microsoft debt and doesn’t
mind paying up a little.
Still, $100 million… that’s a lot of money to pay out
in interest, even for Microsoft, isn’t it? No, it’s not. It’s
more like a rounding error, totaling just two days worth of
free cash flow. Microsoft could borrow 10 times its current
debt load and barely feel the added burden. Berkshire
Hathaway can’t make the same claim.
Microsoft is the world’s best credit. When you’re the
shareholder, you’re last in line behind all the company’s
other creditors – secured bondholders, unsecured bond-
holders, preferred stock, taxes, wages... everyone. When the
coverage is the best in the world for all the creditors ahead
of you, then it’s the best in the world for you, too.
Now, about it being the world’s cheapest stock…
Last December, when I told (and told and told)
Stansberry Alliance members to buy Microsoft, I said it
Volume 8, Issue 3, November 2009
was cheap enough to buy itself. It sounds like more hyper-
bole, but Microsoft has enough balance-sheet cash and
earns enough free cash flow to finance enough debt to buy
all of its outstanding common stock at current prices.
Surely, with the stock up 58% in the past year, and
with the market cap at $260 billion, that can’t possibly
still be true.
Yes, it’s still true! Let me show you…
Market cap + debt: $263.6 billion
Cash and short-term investments: $36.7 billion
Annual free cash flow: $18.99 billion
For Microsoft to buy all of its outstanding shares at
current prices, first assume you take $33 billion off the
balance sheet and buy back stock with it. This is like the
“down payment” in the transaction. Then assume you
borrow enough to buy back the remaining stock and all
debt, about $230.6 billion.
Then you have to figure out the interest charges on
that debt. Microsoft is a triple-A company. Moody’s
triple-A bond yield for the month of October was 5.1%.
That means the interest would cost about $11.76 billion
per year. With Microsoft’s $18.99 billion of annual free
cash flow, you could pay that interest and still pay your-
self over $7 billion in dividends the first year.
Microsoft is still cheap enough to buy itself. Let’s be
clear: This is purely hypothetical. A $260 billion buyout
deal is too big to happen. But the exercise is an excellent
way to illustrate how safe and cheap Microsoft shares still
are today, even though they’ve performed extraordinarily
well over the past year.
This little financial exercise was inspired by a couple
lines in Ben Graham’s classic investment book, The
Intelligent Investor. In Chapter 20, titled “Margin of Safety”
as the Central Concept of Investment, Graham wrote:
There are instances where a common stock may
be considered sound because it enjoys a margin of
safety as large as that of a good bond. This will
occur, for example, when a company has out-
standing only common stock that under depres-
sion conditions is selling for less than the amount
of bonds that could safely be issued against its
property and earning power. (Emphasis added.)
In other words, when a company has enough proper-
ty and earnings power to buy itself, it’s really safe and real-
ly cheap. That’s Microsoft, circa November 2009. BUY
5 Extreme Value
Microsoft (Nasdaq: MSFT) up to $30 a share.
Berkshire Hathaway Just Pulled the
Biggest, Boldest Move in Its History
Berkshire Hathaway (NYSE: BRK-A) recently
announced it will buy the portion of Burlington Northern
Santa Fe it doesn’t already own. It’s the largest deal
Berkshire has ever done. It reminds me of another deal,
one Berkshire did back in 1998.
Back then, Berkshire Hathaway was looking at the
toppiest stock market in history and holding 80% of its
investments in stocks. It had enormous capital gains it
didn’t want to pay taxes on, but it also had a desperate
need to reduce its exposure to equities. It needed to exit
without selling. So it bought General Re for $22 billion
of Berkshire Hathaway stock. At the time, that was its
largest deal by a factor of 10. It reduced Berkshire’s equity
exposure from 80% to 61%.
Without paying capital gains taxes, Buffett gave away
18% of his holdings in overvalued favorites like Coke,
American Express, and Gillette. As Grant’s Interest Rate
Observer described it at the time, he sold without selling.
Fast forward to last week, when Warren Buffett engi-
neered an exit of a different kind, with a different con-
straint than capital-gains taxes. The constraint this time is
inflation. Buffett has been wringing his hands about infla-
tion, warning us earlier this year that “enormous dosages
of monetary medicine continue to be administered,” and
“their threat may be as ominous as that posed by the
financial crisis itself.” In other words, if you thought the
last two years were bad, you ain’t seen nothin’ yet.
So Buffett knew he had to hedge his large position in
cash and other inflation-exposed securities, like his $32.6
Added Value
• Vitaliy Katsenelson’s presentation featuring Kevin
Tuttle’s sideways market graph:
http://contrarianedge.com/book/presentation.
• Jeff Matthews’ blog:
http://jeffmatthewsisnotmakingthisup.blogspot.com.
• Finally, there’s a book you should read cover-to-cover as
soon as you can: It’s called F Wall Street, by Joe Ponzio:
www.fwallstreet.com.
Extreme Value
billion fixed-income portfolio. Oh, one more thing: Just
as he needed to sell without incurring taxes back in 1998,
this time he needed to get rid of cash without actually
spending it.
If Warren Buffett gives up his cash, he may as well not
come to work anymore. It’d be the rough equivalent of
denying Michelangelo the opportunity to paint. Buffett
needs to stay liquid and nimble. He is nothing if not oppor-
tunistic and can’t afford to be caught with his cash down.
So how does he give up his cash without giving up
his cash? He uses the same proxy for the undesirable asset
that he did back in 1998, his stock. Back then, he used
Berkshire Hathaway stock as a proxy for the equities he
couldn’t sell. This time, he’s using Berkshire Hathaway
stock as a proxy for the cash he can’t get rid of.
The Burlington Northern deal will be 60% cash, 40%
stock… but Buffett is borrowing about half the cash, so
he’s only using about $8 billion of Berkshire Hathaway’s
cash. He should have about $20 billion in cash left over
after the deal is done. That’s plenty for him to play with.
Some people, among them blogger and money manag-
er Jeff Matthews, suggest the General Re deal was not a
good one. It certainly wasn’t wonderful, but it wasn’t a dis-
aster, either. Buffett paid $22 billion for $25 billion of
investable assets. He tripled Berkshire Hathaway’s float in a
single transaction. Gen Re’s float is currently running at lit-
tle or negative cost these days and should continue growing
at its somewhat slow historic rate of about 4%. That’s
decent, and in Buffett’s hands, probably good enough.
As for buying Burlington Northern as an inflation
hedge, that’s the easy part. Buffett now owns 32,000 miles
of track and 220,000 railcars, which I’m sure would cost
more to replace than the $34 billion valuation Buffett’s
$100-per-share purchase price places on the business.
You can’t outsource railroads to China. We can’t live
without the stuff railroads move, and you can’t move the
stuff any other way. Commodities like coal, iron ore, nickel,
and other heavy stuff can’t travel by anything but railroads
and big ships. Other methods lack the scale to be economi-
cally feasible. Coal is the biggest commodity the railroads
move. We get half our electricity from coal. Anybody who
thinks we can live without coal is not paying attention.
Though I might not see eye to eye with Jeff
Matthews on Gen Re, Matthews did make a smart sug-
gestion about why Buffett bought the country’s second-
largest freight railroad: Businesses nationwide have run
6 Volume 8, Issue 3, November 2009
inventories down to conserve cash. Matthews knows for 30 years and be fully taxed.
Burlington Northern will have to move a lot of stuff
One has to wonder… what happens when the Federal
around over the next several months to rebuild those
inventories. Also, Matthews notes Warren Buffett “stands
at the center of an economic supply chain that stretches
from a candy maker in South San Francisco to a high-
tech machine tooling supplier in Israel.”
No wonder he bought Burlington Northern. It’s a bril-
liant move, and one that adds significant value to Buffett’s
empire. BUY Berkshire Hathaway (NYSE: BRK-A).

So Long: A 26-year Bull Market

in U.S. Treasury Bonds Ends
Back in 1982, everybody thought inflation was here
to stay, stocks were toxic waste, and the gold price was
going to the moon.
What really happened? Gold stopped short of a lunar
landing, it was the last great moment in history to buy
stocks, and the long bond went south in a hurry.
As the story goes, severely hawkish Federal Reserve
policy crushed inflation, pushing interest rates to high dou-
ble-digit levels, attracting the world back to the U.S. dollar.
(If you ask me, the whole thing was a disaster. If they’d left
the damn dollar alone, we might be rid of it by now.)
As evidenced by the accompanying chart, I believe
the bull market in U.S. Treasuries that began in 1982’s
panic bottom came to a dramatic end last December. U.S.
long bonds saw the final, blow-off top of a 26-year bull
market as investors rushed out of stocks, corporate bonds,
and commodities and – perhaps for the last time ever –
clung to the perceived safety of U.S. Treasury obligations.
Bond prices move inverse to bond yields, so a bull
market in bonds looks like a bear market in yields. The
turning point in the bond bull market is obvious, cap-
tured in the sharp “V” formation at the far right of this
chart of bond yields. That’s when the long bond yield
sunk to around 2.5%.
I don’t think it’ll ever see that level again, despite Fed
promises to keep interest rates down. When the Fed says
it’ll keep interest rates low, it’s like Britney Spears saying
she’s done having babies. Don’t bet on it.
Invert the long bond’s paltry 4.4% yield, and you
find Uncle Sam selling for the lofty valuation of 22.7
times earnings, earnings that by definition will remain flat
Reserve stops buying Treasuries and starts unloading them,
eliminating a major source of price support? Who will step
in and pick up the slack? No one, if they’re smart.
If only there were an easy, long-term way to sell
Treasury bonds short. I don’t like the exchange-traded
funds designed to correlate with the inverse of Treasury
prices over short periods of time. I want the bet to work
over a long period of time.
The incentive at the Fed is to keep interest rates low,
so it can push more cheap money through the system, to
try to fool us all into believing the economy is recovering.
But it’s a relatively low-risk proposition to predict higher
interest rates.
I don’t care to venture a guess as to when the market
will insist on higher interest rates for the risk of holding
Treasury obligations. I do, however, know what Treasury
bills deserve. They deserve for the market to become skep-
tical enough that it’ll demand to be compensated for the
increased risk.
They deserve to be yielding over 10%... just like all
the other junk bonds.
Good investing,
Dan Ferris
November 13, 2009

Volume 8, Issue 3, November 2009 7 Extreme Value

 The Extreme Value Portfolio
Prices as of November 12, 2009

Company Ref. Price Ref. Date Recent Price Dividends Return Buy Advice
World Dominators
Wal-Mart (WMT) $48.32 10/13/06 $53.24 $2.82 16% Buy up to $51
ExxonMobil (XOM) $64.07 7/14/06 $71.90 $5.22 20% Buy up to $66
Automatic Data Processing (ADP) $34.80 10/10/08 $43.32 $1.32 28% Buy up to $40
United Parcel Service (UPS) $44.68 10/27/08 $56.83 $2.25 32% Buy under $45
Procter & Gamble (PG) $54.50 1/30/09 $61.30 $1.32 15% Buy up to $56
Microsoft (MSFT) $25.43 9/8/06 $29.36 $1.36 21% Buy up to $30
Berkshire Hathaway (BRK-A) $84,900 7/8/05 $102,000.00 20% Buy up to $128,000
Intel Corporation (INTC) $15.27 4/10/09 $19.68 $0.42 32% Buy up to $16
Scale/Cost Advantages
Alexander & Baldwin (AXB) $21.04 10/11/02 $29.40 $6.57 71% Buy up to $30
Tejon Ranch Corp. (TRC) $28.80 12/12/02 $25.99 -10% HOLD
St. Joe Company (JOE) $29.85 1/9/03 $26.36 $2.72 -3% Buy up to $35
Consolidated Tomoka (CTO) $26.58 9/12/03 $33.43 $2.04 33% Buy up to $40
EnCana Corporation (ECA)* $20.10 5/14/04 $56.11 $4.40 201% HOLD
Monopoly/Oligopoly
Altria Group (MO)* $23.45 3/14/08 $19.02 $1.91 -11% Buy up to $25
Korea Electric Power (KEP) $10.55 9/10/04 $14.32 $0.65 42% Buy
POSCO ADR (PKX) $49.51 4/8/05 $113.74 $0.37 130% HOLD
Latin American Export Bank (BLX) $15.90 11/14/03 $13.91 $7.76 36% Buy
Network Effect
Dun & Bradstreet (DNB) $98.21 10/12/07 $80.54 $2.47 -15% Buy
IMS Health (RX) $13.23 8/14/2009 $21.26 $0.03 61% HOLD
Professional Help
Icahn Enterprises (IEP) $19.50 6/10/04 $39.47 $2.90 117% Buy up to $40
Longleaf Partners (LLPFX) $30.83 2/13/04 $23.10 $7.39 -1% Buy
Sequoia Fund (SEQUX) $129.31 6/13/08 $109.99 $3.91 -12% Buy
Altius Minerals (ALS.TO)** $6.98 3/26/09 $7.06 1% Buy up to C$7.25
Sprott Resource Corp. (SCP.TO)** $2.60 2/17/09 $3.75 44% Buy up to C$3.10
Intellectual, Intangibles, and Brands
Prestige Brand Holdings (PBH) $6.23 5/14/09 $6.85 10% Buy up to $7
International Royalty Corp (ROY) $1.71 3/16/09 $4.04 $0.02 137% Buy up to $4
Philip Morris Intl (PM) spinoff $50.00 3/14/08 $49.96 $3.20 6% Buy up to $53
KHD Humboldt Wedag (KHD)*^ $6.34 8/8/03 $9.44 $8.36 181% Buy
H&R Block (HRB) $22.32 4/13/06 $19.36 $1.99 -4% Buy up to $20
Good Competitors in No Moat Industries
Portfolio Recovery Associates (PRAA) $35.11 11/14/08 $46.38 32% Buy up to $36
Comstock Resources (CRK) $27.81 8/12/05 $38.99 40% HOLD
Short Sales
Jack in the Box (JACK) $21.96 5/14/09 $19.14 13% Sell short
Zions Bancorp (ZION) $16.31 9/14/09 $12.94 $0.01 21% Sell short
* Reference price has been adjusted to reflect a stock split or spinoff. ^ Dividends include spinoffs. ** Prices in Canadian dollars.

Extreme Value’s investment philosophy is buy-and-hold. In general, we recommend two kinds of stocks, (1) those that sell at significant discounts to their net
asset values, and (2) those that offer high earnings yield. With every stock we pick, we go to great lengths to make sure your investment comes with a generous
margin of safety. A margin of safety simply means that, if the worst happened, and these companies went out of business, shareholders could still expect to gain.
Our emphasis is on the value of the enterprise, and the price you’re paying for it. Buying and selling are simple for value investors. Buy stocks when they are
cheap and safe. Sell stocks when they get expensive or become unsafe. This portfolio is not intended to represent the exact prices at which you could get in or
out of a stock. Rather, it represents the value of our insights at the time our material is published.

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