The GM Building, 767 Fifth Avenue, 18

th
Floor, New York, NY 10153

Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160
Managing Partners fax: 240 368 0299
www.T2PartnersLLC.com

October 2, 2011

Dear Partner,

Our fund declined 9.5% in September vs. -7.0% for the S&P 500, -5.9% for the Dow and -6.3%
for the Nasdaq. Year to date, it`s down 29.6% vs. -8.7% for the S&P 500, -3.9% for the Dow
and -8.4% for the Nasdaq.

August largely repeated itself in September for us: our short book was down nearly twice the
market, but these gains were far outweighed by losses across the board in our long portfolio,
despite generally good company-specific news regarding our major holdings (discussed below).
Amidst another tumultuous month in the markets, investors again dumped stocks that are even
slightly illiquid, perceived to be risky, or valued primarily on future, rather than current, profits
traits that characterize many positions in our fund.

Our three biggest losers by far were Grupo Prisa (-32.9%), Iridium (the warrants, which
comprise the bulk of our position, were down 29.0%), and Howard Hughes Corp. (-22.2%).
Other losers included Goldman Sachs (-18.6%), Citigroup (-17.5%), Microsoft (-6.4%), and
Berkshire Hathaway (-2.7%). You know it`s a tough month on the long side when your biggest
winner is up only 0.6% (J.C. Penney).

Our short book performed well, led by declines in First Solar (-36.8%), ReachLocal (-25.3%),
OpenTable (-24.6%), Boyd Gaming (-21.6%), Ethan Allen (-20.8%), ITT Educational Services
(-20.2%), St. Joe (-18.7%), Philips-Van Heusen (-12.6%), Green Mountain Coffee Roasters
(-11.3%), Salesforce.com (-11.2%), and Lululemon Athletica (-11.0%).

:HYH%HHQ7KURXJK7KLV%HIRUH
While the broader markets aren`t in Iull-scale collapse like they were in late 2008 through early
March 2009, our portfolio is behaving very similarly, as shown by this chart, which compares
our Iund`s perIormance over the last Iive months to its perIormance Irom October 2008 through
February 2009:

-2-



There are striking parallels between these two five-month periods. In both cases:

x We identified and invested in materially undervalued stocks, but with the benefit of
hindsight (which is always 20/20), we bought too early, as we didn`t Iully appreciate how
much stocks would tumble amidst the market turmoil in other words, we bought cheap
stocks, but they became much cheaper;
x We maintained our conviction in the great majority of our holdings and kept adding to
many of them at lower and lower prices, reducing our average cost significantly;
x Our largest position (mid-teens percentage) was Berkshire Hathaway;
x We made significant investments in the most out-of-favor U.S. financial and consumer-
related sectors;
x We purchased a number of what we call mispriced options such as General Growth
Properties in early 2009, which turned into the biggest winner in our Iund`s history
(today we own a few similar situations that we may discuss in future letters);
x We ended the five-month periods with similar positioning: at the end of February 2009,
our Iund was 113 long by 55 short, whereas today it`s 119 long by 50 short.

Our actions paid off last time, and we`re conIident that they will again (though we can`t predict
the timing). This chart shows our Iund`s perIormance in the subsequent seven months in 2009:
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
0 1 2 3 4 5
Month
October 2008 -
February 2009
May - Sept 2011
-3-



:HUHLQWKH6DPH%RDW
We believe in eating our own cooking we have a higher percentage of our net worths in our
funds than anyone, by far so it goes without saying that no-one has lost more money or feels
worse about our Iund`s perIormance over the past year than we do.

We`re not only in the same boat Iinancially, but also in another way: the decisions we have to
make when faced with poor performance. To the extent that you choose to invest in funds, you
have thousands of choices, just as we have thousands of stocks to choose from. As we discussed
in our last letter (in the section entitled 'Guaranteed UnderperIormance), it is a certainty that
every fund you invest in will underperform at times, just as every stock we invest in will do so as
well. This year, for example, three great businesses whose stocks we own have all
underperformed the market: Berkshire Hathaway (-11.3%), Wells Fargo (-22.2%), and Goldman
Sachs (-43.8%) (note that we only invested in the latter two in August, aIter they`d Iallen
substantially).

The critical question all of us face is: what should we do when a fund or a stock we own
performs poorly: sell, hold, or buy more? This decision, more than any other, is the key to long-
term investment success far more important than timing the entry point exactly right.

Unfortunately, there is no easy answer every fund and every stock is different but here are a
few thoughts: First, to quote Ben Graham, you must let the market be your servant, not your
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
0 1 2 3 4 5 6 7 8 9 10 11 12
Month
October 2008 -
September 2009
-4-

guide. Just because other investors are selling in a panic doesn`t mean you should. In some
cases, the herd is right, but the real money is made betting against the herd when it`s wrong. It
may be the right thing to sell and move on you don`t have to make it back the same way you
lost it but the decision whether to do so mustn`t be guided by other investors` behavior.

Our approach is to tune out the short-term noise and carefully evaluate the company and its
management, focusing on the long-term track record rather than the short-term poor
performance. The key question to ask is: has anything changed that leads us to believe that the
recent performance is likely to be permanent, or is this just one of those inevitable periods of bad
luck and/or fixable mistakes, such that the company is likely to revert to its long-term
outperformance?

In the case of Berkshire Hathaway, Wells Fargo and Goldman Sachs, we believe the latter is the
case, so we`ve been buying. We think the same will prove to be true Ior our Iund, as neither our
investment approach, which is rooted in the timeless principles of value investing, nor our ability
to execute on it has changed.

(FRQRPLF2YHUYLHZDQG2XU)XQGV3RVLWLRQLQJ
We attended a private dinner this past week with Warren Buffett, who, thanks to Berkshire
Hathaway`s numerous operating businesses, has his Iinger on the pulse oI the American
economy better than perhaps anyone. In response to a question about whether he`s still bullish
on economic growth prospects for U.S. over the next 2-3 years, he replied:

Sure, and over the next six months for that matter. We have 70-plus businesses and about five of
them are related to residential home construction and they are flat on their rears, as they have
been for more than three years. But the other 60-plus are doing very well, as is the rest of
American business.

We have three jewelry businesses with over 300 stores and I thought same store sales might be
down in August and September, but they were up significantly. We have a number of furniture
businesses and people don`t have to buy Iurniture and their same stores sales are up
significantly. We are seeing good business across the board except for residential home
construction.

Buffett is only one of many data points we use in forming our economic views, but most of what
we`re seeing is consistent with his remarks. To be sure, the U.S. economy is soft, unemployment
remains stubbornly high, and consumer confidence, spending, and the housing market are quite
weak, but corporate profits and profit margins are at all-time highs and corporate balance sheets
are extremely strong, so it`s a mixed picture. Overall, however, the U.S. economy is hanging in
there for now. Those last two words are key, of course. The market is always forward looking
and investors are very worried about various storm clouds on the horizon, especially the
sovereign debt crisis in Europe and signs that, in China, growth is slowing and/or a real estate
bubble may be bursting.

We are closely monitoring developments and have been increasing our short exposure
selectively, but we remain substantially net long because, unlike 2008, when we were convinced
that the bursting of the housing bubble was going to lead to a major shock to the system, today
-5-

we think that the most likely scenario is that the U.S. economy will muddle along for the next
few years hitting air pockets like the one we`re in now on occasion, no doubt, but avoiding any
major crises. Under this scenario, the market will likely be choppy and range-bound, not steeply
declining, in which case we expect our portfolio to do well.

How We Approach I nvestment Decision Making Today
We believe that the key to rebounding from this period of dismal performance is to pretend like
it didn`t happen. Seriously. Allow us to explain:

Beyond the financial impact, we have our reputations on the line, take pride in what we do, and
know most of our investors personally, so we Ieel like we`ve let our Iriends and Iamilies down
a truly lousy feeling. Given this, it would be very easy to fall into a number of mental traps: self-
pity, obsessing about what we could have done differently, going to cash or a market neutral
position or, most dangerously, the opposite: swinging for the fences in an attempt to quickly
make back the losses. We are doing none of this. Instead, we`re careIully evaluating our entire
portfolio with the following question in mind: if we were starting our fund from scratch today
and held only cash, what would we do?

The answer is that our portfolio would look just like it does. It hasn`t been this attractive since
the market bottom in early 2009 it`s not quite as cheap as it was then, to be sure, but the risks
oI a systemic meltdown and another Great Depression aren`t nearly as great either. Simply put,
we think every significant position in our fund could easily double in the next 2-3 years, with the
possible exception of three of our safest big-cap stocks, Berkshire Hathaway, Microsoft and AB
InBev, which 'only have 50-80% upside.

Winners and Losers This Year
Here are our 10 biggest losing positions this year, with the percentage losses to our fund:

1. Iridium -3.6%
2. Berkshire Hathaway -3.5%
3. Grupo Prisa -3.0%
4. J.C. Penney -2.6%
5. Howard Hughes -2.1%
6. Seagate -1.9%
7. CIT Group -1.7%
8. Resource America -1.7%
9. Microsoft -1.6%
10. Citigroup -1.3%

These stocks account for the great majority 23 percentage points of our losses this year.
Offsetting this are almost no winners on the long side here are our five largest:

-6-

1. Kraft 0.3%
2. ADP 0.3%
3. TravelCenters of America 0.2%
4. Echostar 0.2%
5. American Express 0.2%

What can we learn from this? First, the paucity of winners is striking and very unusual. Last
year, for example, we had plenty of losing positions on the long side Target alone cost us 3.3
percentage points of return but they were more than offset by four big winners:

1. General Growth Props. 8.1%
2. Berkshire Hathaway 5.4%
3. Liberty Acquis. Warrants 5.2%
4. BP 4.3%

This year, we`ve had none but we don`t think this is a permanent state oI aIIairs.

A second thing to note is that we`ve made no single, obvious mistake. For example, unlike a
number of well-known Iunds that have perIormed poorly this year, we weren`t heavily exposed
to financial stocks earlier this year.

Finally, and most importantly, we think nearly all of our losses this year are temporary. We
continue to hold and in many cases have added to substantial positions in eight of our ten
largest losing positions this year and even the two we no longer hold are been replaced with
similar stocks (Seagate with Western Digital and CIT Group with more attractive financial
stocks). Thus, we believe the losses we`ve taken to date will ultimately become large proIits.

It is possible indeed, almost certain that we will be wrong in our assessment of one or more
of these positions. But rest assured that we aren`t clinging to them, reIusing to acknowledge our
mistakes, in an irrational attempt to make back our losses. These are the stocks we would own
today iI we`d never owned them and were starting a new Iund Irom scratch.

Comments on Some Stocks
In conclusion, we`d like to share some brief comments about a few of our positions:

Berkshire Hathaway
Last week Berkshire Hathaway issued a press release announcing an open-ended share
repurchase program. This is a bold statement by the world`s savviest investor, Warren BuIIett,
who is saying a number of important things, not only to Berkshire shareholders, but to investors
in general. Overall, it makes us even more bullish on the stock and, though it was already our
largest position, we added to it as we think this effectively puts a floor on the stock price slightly
above the current level, while the upside remains large. See Appendix A for further comments in
an article we published.

-7-

Howard Hughes
We have spoken with management and others, trying to Iigure out why Howard Hughes`s stock
continues to decline we certainly want to know iI we`re missing something and don`t have an
answer other than investors having worries about the economy and shunning companies that are
primarily valued on profits a number of years into the future (the discount rate investors are
using has risen sharply recently). This explanation is good news because our estimate of
intrinsic value is unchanged, yet the margin of safety is now even greater.

Iridium
Iridium is a virtually identical situation, with the stock declining sharply on no news. The
company reported strong Q2 earnings in August and we have no reason to believe its business
has weakened since then. In Q2, revenues grew 14%, net income jumped 265%, operational
EBITDA rose 34%, total billable subscribers increased 25%, and the company reaffirmed
guidance for the year. Every element of our investment thesis is intact and the story is playing
out so far as we expected, but this is a multi-year story, so the stock is subject to short-term
volatility.

Grupo Prisa
The story is more complex with Grupo Prisa. Spain and Portugal are going through a crisis
similar to the one the U.S. went through in late 2008, so it`s not surprising that the stock oI a
company with 77% of its revenues in these two countries is suIIering. It`s also not surprising
that the company`s operating perIormance has been aIIected by the deep recession in its primary
markets, though the company is holding up remarkably well in light of this: in the first half of
2011, revenues were down only 1.2, adjusted EBITDA rose 3.6, and the company`s
restructuring and cost-cutting is on track.

Prisa, however, needs to refinance its debt to give it breathing room to get through the current
crisis. Our discussion with management and others plus our own experience leads us to have
a high degree of confidence that Prisa will be able to do so successfully, but the uncertainty is
weighing heavily on the stock.

Prisa reminds us of our experience with Huntsman in late 2008 and early 2009. Both companies
have strong management and assets, yet are in economically sensitive businesses and have too
much debt. In both cases, we calculated intrinsic value of more than $15/share in any kind of
normal economic environment, but the stocks got hammered as the economic environment
deteriorated and investors panicked.

-8-

Here`s the stock chart Ior Huntsman in the four months from November 2008 through February
2009:



The stock chart for Prisa (the B shares, which comprise the bulk of our holdings) over the past
four months looks very similar:



We`re optimistic that Prisa will rebound, as Huntsman did it was a 7-bagger in one year and
nearly a 10-bagger in less than two years, as this chart shows:



-9-

Goldman Sachs
We started nibbling at Goldman Sachs in August and added materially to it last month, such that
it is currently a 4.0 stock position, plus we have a 1.3 position in $100 strike Jan. `13
calls. Business is very weak for Goldman right now, so we assume that Q3 (which will be
reported on Oct. 18
th
) will be terrible and the next few quarters might be as well. We also
anticipate that the Dodd-Frank Act and other regulation means that the business will likely never
be as profitable as it was in its glory days. But we don`t expect any big writedowns we think
Goldman is more aggressive in writing down assets and marking them to true market prices than
anyone.

When the dust settles, we think Goldman will remain the premier investment banking franchise
in the world, in which case it`s worth a substantial premium to book value, which as of the end
of Q2 stood at $131.44 (tangible book was $121.60). Thus, at $94.55, a 28% discount to book
(and a 22% discount to tangible book), we think the stock is a steal.

Citigroup
We have also been buying Citigroup, making it a 5.3% stock position today. This is perhaps the
most controversial stock we own, as the consensus view on the company couldn`t be more
negative, but we have a different view.

We think of Citigroup as two businesses: good bank (Citicorp) and bad bank (Citi Holdings).
The former is a fabulous worldwide franchise that generates robust and growing profits that
could easily approach $10/share within a few years (net income was $1.19/share in Q2 nearly
$5/share annualized). Citicorp has been strongly profitable for more than two years, with the
majority of profits coming from high-growth emerging markets, as this chart shows:



-10-

In particular, consumer banking has been exceptionally strong: North American consumer
banking had $2.1 billion of net credit margin in Q2, up 32% year over year, and international
consumer banking had $4.1 billion of net credit margin, up 17%. This growth was offset in Q2
by a 29% decline in net income in the Securities and Banking division, though it still earned a
healthy $1.2 billion.

Ah, but what about bad bank? Citigroup is rapidly shrinking Citi Holdings via sales, charge-offs
and runoff, as this chart shows:


(1) Peak quarter

Losses at Citi Holdings have also been shrinking thanks to lower expenses, credit losses, and
loan loss reserves:
-11-



But what about the balance sheet? Might Citigroup need to raise additional capital or require
another government bailout? We think not. Here are Citigroup`s key capital metrics, which are
quite strong and trending positively:



Overall, we like what we see: good bank is thriving, bad bank is shrinking and reducing losses,
and the balance sheet is in good shape. The current headlines are grim and may remain so for
some time but we think the stock more than discounts this: at $25.61, it trades at a 58% and
-12-

47 discount to book and tangible book value, respectively, and at a mere 6.5x this year`s
estimated earnings.

For another way to see how cheap the stock is, consider that it has returned to levels not seen
since the depths of the financial crisis in early 2009, yet both the company and macro
environment are much stronger:



We think tangible book value per share, which was $48.75 in Q2, up 16% year over year, will
continue to grow and that the stock is worth at least 1.0x tangible book, so we think it`s a good
bet to double in the next few years.

Note that Goldman, Citigroup and the other financial stocks we own should benefit over time
from many of their competitors encountering distress or even going out of business. As
examples, Goldman no longer has to compete against Bear Stearns or Lehman Brothers,
Citigroup should be able to take share in Europe from its weakened competitors, and Wells
Fargo no longer has to compete against Washington Mutual.

MRV Communications
In our July letter, we wrote:

MRV Communications operates in the network communications industry. The company grew
rapidly over the last decade, but did it the wrong way by making a number of high-priced, ill-
fated acquisitions. MRV lost control of its business, became delinquent on its financial filings,
and stock was delisted. Over the last two years, an activist investment group gained control of
the board, stabilized the company, divested several underperforming divisions, and brought the
financials up to par.

The company now consists of two operating divisions, network equipment group and network
integration group, which we believe are worth at least $1/share. Add approximately $1/share of
cash and substantial NOLs, and we estimate the intrinsic value of the company to be in excess of
$2 per share (without incorporating the NOLs) vs. the current share price of $1.42.

-13-

Since then, the company reported strong Q2 earnings, with revenues up 19% to $68.2 million
and operating profit up 110% to $3.6 million. In addition, cash net of all debt and long-term
liabilities is $137.7 million ($0.87/share). Nevertheless, the stock has fallen to $1.23. We
continue to believe that the stock is worth more than $2/share. We are part of an activist group,
so we are limited in what we can say at this time, but rest assured that we are working hard to
unlock this value.

Conclusion
Thank you for your continued confidence in us and the fund. As always, we welcome your
comments or questions, so please don`t hesitate to call us at (212) 386-7160.

Sincerely yours,

Whitney Tilson and Glenn Tongue

The unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvested
dividends) is:

September Q3 Year-to-Date Since Inception
T2 Accredited Fund net -9.5% -25.7% -29.6% 100.7%
S&P 500 -7.0% -13.9% -8.7% 15.5%
Dow -5.9% -11.5% -3.9% 59.2%
NASDAQ -6.3% -12.7% -8.4% 14.4%
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2
Accredited Fund was launched on 1/1/99.

-14-

T2 Accredited Fund Performance (Net) Since I nception


T2 Accredited Fund Monthly Performance (Net) Since I nception

Note: Returns in 2001, 2003, and 2009 reflect the benefit of the high-water mark, assuming an investor at inception.
-40
-20
0
20
40
60
80
100
120
140
160
180
200
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
(%)
T2 Accredited Fund S&P 500
T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P
A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500 A F 500
January 7.8 4.1 -6.3 -5.0 4.4 3.6 -1.8 -1.5 -5.5 -2.6 4.7 1.8 1.1 -2.4 1.9 2.7 2.4 1.7 1.9 -5.9 -3.6 -8.4 -1.6 -3.6 -2.8 2.4
Fe bruary -2.9 -3.1 6.2 -1.9 -0.6 -9.2 -1.1 -2.0 2.9 -1.6 7.0 1.5 2.1 2.0 -3.1 0.2 -3.3 -2.1 -6.9 -3.3 -8.9 -10.8 7.3 3.1 4.1 3.4
March 4.1 4.0 10.3 9.8 -2.6 -6.4 3.0 3.7 1.4 0.9 3.9 -1.5 3.9 -1.7 3.9 1.3 -0.8 1.1 -2.3 -0.5 2.9 9.0 4.6 6.0 -4.1 0.0
April 2.1 3.7 -5.1 -3.0 5.1 7.8 -0.2 -6.0 10.5 8.2 2.4 -1.5 0.6 -1.9 2.2 1.4 4.4 4.6 -0.9 4.9 20.1 9.6 -2.1 1.6 1.9 3.0
May -5.7 -2.5 -2.8 -2.0 1.8 0.6 0.0 -0.8 6.6 5.3 -1.4 1.4 -2.6 3.2 1.8 -2.9 2.5 3.3 7.9 1.2 8.1 5.5 -2.6 -8.0 -1.9 -1.1
June 2.2 5.8 4.1 2.4 4.6 -2.4 -7.3 -7.1 2.9 1.3 0.1 1.9 -3.1 0.1 -0.2 0.2 -3.0 -1.5 -1.2 -8.4 -5.0 0.2 4.5 -5.2 -2.4 -1.7
July -0.7 -3.2 -3.6 -1.6 -1.1 -1.0 -5.0 -7.9 2.3 1.7 4.6 -3.4 0.5 3.7 -0.9 0.7 -5.4 -3.0 -2.5 -0.9 6.8 7.6 3.5 7.0 -4.6 -2.0
August 4.1 -0.4 5.4 6.1 2.5 -6.3 -4.3 0.5 0.4 1.9 -0.9 0.4 -3.2 -1.0 2.9 2.3 1.7 1.5 -3.3 1.3 6.3 3.6 -1.5 -4.5 -13.9 -5.4
Se pte mbe r -3.3 -2.7 -7.2 -5.3 -6.1 -8.1 -5.4 -10.9 1.7 -1.0 -1.6 1.1 -1.5 0.8 5.0 2.6 -1.1 3.6 15.9 -9.1 5.9 3.7 1.7 8.9 -9.5 -7.0
Octobe r 8.1 6.4 -4.5 -0.3 -0.8 1.9 2.8 8.8 6.2 5.6 -0.4 1.5 3.5 -1.6 6.3 3.5 8.2 1.7 -12.5 -16.8 -1.9 -1.8 -1.7 3.8
Nove mbe r 2.8 2.0 -1.5 -7.9 2.3 7.6 4.1 5.8 2.2 0.8 0.8 4.0 3.1 3.7 1.9 1.7 -3.6 -4.2 -8.9 -7.1 -1.2 6.0 -1.9 0.0
De ce mbe r 9.8 5.9 2.3 0.5 6.5 0.9 -7.4 -5.8 -0.4 5.3 -0.2 3.4 -1.3 0.0 1.4 1.4 -4.3 -0.7 -4.0 1.1 5.5 1.9 0.5 6.7
YTD
T O T A L
31.0 21.0 -4.5 -9.1 16.5 -11.9 -22.2 -22.1 35.1 28.6 20.6 10.9 2.6 4.9 25.2 15.8 -3.2 5.5 -18.1 -37.0 37.1 26.5 10.5 15.1 -29.6 -8.7
1999 2000 2001 2002 2003 2004 2011 2005 2006 2007 2008 2009 2010
-15-

Appendix A

%HUNVKLUH+DWKDZD\V1HZ6KDUH5HSXUFKDVH3URJUDP And What I t Means

September 26, 2011
http://seekingalpha.com/article/296012-berkshire-hathaway-s-new-share-repurchase-program-
and-what-it-means

This morning Berkshire Hathaway issued a press release announcing an open-ended share
repurchase program. This is a bold statement by the world`s savviest investor, Warren BuIIett,
who is saying a number of important things, not only to Berkshire shareholders, but to investors
in general. Overall, it makes us even more bullish on the stock and, though it was already our
largest position, we added to it this morning as we think this effectively puts a floor on the stock
price slightly above the current level, while the upside remains large.

Interestingly, this is only the second time that Buffett has offered to buy back stock. The first
was in his 1999 Letter to Berkshire Hathaway Shareholders (pages 16-17), which was released
on Saturday, March 11, 2000 (not coincidentally, the very moment that the Nasdaq peaked). At
the time, the stock was at $41,300, but it popped 8% on the following Monday and continued
rising all week, closing the following Friday at $51,300, up 24.2%, so BufIett didn`t end up
buying back any stock. This chart shows how the stock performed in the subsequent year, rising
72% vs. an 11% decline in the S&P 500:



We wouldn`t be surprised to see similar outperIormance over the coming year.

Turning to today`s press release, here`s the Iull text:

Ber kshi re Hathaway Authorizes Repurchase Program

Omaha, NE (NYSE: BRK.A; BRK.B)Our Board of Directors has authorized Berkshire Hathaway to
repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-
current book value of the shares. In the opinion of our Board and management, the underlying businesses of
-16-

Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise.
If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares,
benefiting shareholders who retain their interest.

Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would
reduce Berkshire`s consolidated cash equivalent holdings below $20 billion. Financial strength and
redundant liquidity will always be of paramount importance at Berkshire. Berkshire may repurchase shares
in open market purchases or through privately negotiated transactions, at management`s discretion. The
repurchase program is expected to continue indefinitely and the amount of purchases will depend entirely
upon the levels of cash available, the attractiveness of investment and business opportunities either at hand
or on the horizon, and the degree oI discount Irom management`s estimate oI intrinsic value. The
repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or
Class B shares.

Buffett undoubtedly wrote this press release and, as all long-time Buffett-watchers know, he
careful chooses every word so let`s closely examine what he wrote and what it means.

Most importantly, Buffett is saying that the stock is deeply undervalued. He wouldn`t be buying
it back at a 10% premium to book value if he thought its intrinsic value was, say, 20% or even
30% above book. How undervalued? Well, the press release says: 'the underlying businesses oI
Berkshire are worth considerably more than a 10 premium to book value. The word
'considerably is critical because it`s unnecessary it`s BuIIett`s way oI saying the stock isn`t
just cheap, but is screaming cheap. We peg intrinsic value at close to $170,000 ($113/B share)
as we outline in our slide deck here and we think that the announcement today indicates that
BuIIett thinks it`s in this range as well.

So up to what price is Buffett willing to buy? (Note that oI course it`s actually Berkshire that`s
buying back the stock, not Buffett himself, but he is setting the policy and is the largest
shareholder, with a 23 economic ownership, so it`s eIIectively him.) The press release says a
10 premium to 'then-current book value. The latest filing is the end of Q2 (June 30), when
Berkshire`s book value was $98,716 ($65.81/B share). But this isn`t the current value, so one
needs to consider what book value has done since then. There are a lot of moving pieces, but the
main factors are that the stock portfolio and index puts have moved against Berkshire a bit, but
the company has earned nearly three months of profits, so net net we`d guess that book value
today has declined slightly to perhaps $97,000 ($64.67/B share). Thus, a 10% premium means
that Buffett is willing to buy back stock up to $106,700 ($71.13/B share), less than 2% below
today`s closing price oI $108,449 ($72.09/B share).

In other words, you can buy the stock at almost the same price that the world`s greatest investor
is willing to pay quite an opportunity we think.

We also believe that the share repurchase program likely puts a floor on the stock for a number
of reasons. First, unlike most share repurchase announcements, there`s no dollar or time limit
Berkshire is free to repurchase as much stock as Buffett wishes, for as long as he wishes, as long
as the price is below 110% of book value. Second, as we discuss below, Buffett likely wants to
buy back a lot stock. Finally, Berkshire has enormous liquidity to do so. According to
Berkshire`s Q2 10-Q (posted here), the company has $43.2 billion of cash (excluding railroads,
utilities, energy, finance and financial products), plus another $34.8 billion in bonds (nearly all of
which are short-term, cash equivalents), which totals $77 billion. In the press release, Buffett
-17-

notes that 'repurchases will not be made iI they would reduce Berkshire`s consolidated cash
equivalent holdings below $20 billion, so that means Berkshire has $57 billion, equal to one-
third oI the company`s current market capitalization, that it can deploy immediately in
investments or share repurchases. On top of this, the company generated more than $6.5 billion
in free cash flow in the first half of the 2011 that`s right, more than $1 billion/month is pouring
into Omaha.

Why is Buffett buying back his stock and, in particular, why now? To answer these questions,
let`s look again at his 1999 Letter to Berkshire Hathaway Shareholders, in which he wrote:

There is only one combination of facts that makes it advisable for a company to repurchase its shares: First,
the company has available funds cash plus sensible borrowing capacity beyond the near-term needs
of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-
calculated.

.You should be aware that, at certain times in the past, I have erred in not making repurchases. My
appraisal oI Berkshire`s value was then too conservative or I was too enthused about some alternative use
of funds. We have therefore missed some opportunities though Berkshire`s trading volume at these
points was too light for us to have done much buying, which means that the gain in our per-share value
would have been minimal. (A repurchase of, say, 2% of a company`s shares at a 25 discount Irom per-
share intrinsic value produces only a % gain in that value at most and even less if the funds could
alternatively have been deployed in value-building moves.)

Some oI the letters we`ve received clearly imply that the writer is unconcerned about intrinsic value
considerations but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit
going down). If the writer wants to sell tomorrow, his thinking makes sense for him! but if he intends
to hold, he should instead hope the stock Ialls and trades in enough volume Ior us to buy a lot oI it. That`s
the only way a repurchase program can have any real benefit for a continuing shareholder.

We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value,
conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately
have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders and
potential shareholders the same valuation-related information we would wish to have if our positions
were reversed.

.Please be clear about one point: We will never make purchases with the intention of stemming a decline
in Berkshire`s price. Rather we will make them if and when we believe that they represent an attractive use
oI the Company`s money. At best, repurchases are likely to have only a very minor eIIect on the Iuture rate
oI gain in our stock`s intrinsic value.

So Buffett is clearly not trying to prop up the stock rather, he believes that at a price below
110 oI book value, buying it today is 'an attractive use oI the Company`s money. He is also
implicitly saying that he wants to buy back a lot of stock otherwise it would only have 'a very
minor eIIect on the Iuture rate oI gain in our stock`s intrinsic value.

But in being willing to allocate capital to share repurchases, is Buffett also running up the white
Ilag, admitting that he can`t Iind better things to do with Berkshire`s money? He admits in his
1999 letter that when the stock was cheap in the past, he didn`t buy it because he 'was too
enthused about some alternative use oI Iunds. So why is he willing to buy it now?

The answer is, in part, that Berkshire has become so large that only very large investments say,
$5 billion and up can move the needle, which means the investment universe is smaller,
-18-

making it harder for Buffett to find exceptional bargains. But the bigger reason is that Berkshire
is drowning in so much cash and Iree cash Ilow that BuIIett doesn`t have to choose: he can buy
back billions even tens of billions of his stock and also have plenty of dry powder to do what
he prefers: make large investments. In other words, he can have his cake and eat it too.

To understand why, consider Berkshire`s largest acquisition ever, by Iar: the acquisition oI
Burlington Northern, which cost $26.5 billion Ior the 77.4 that Berkshire didn`t own, oI which
$15.9 billion was cash and the balance was Berkshire stock. Today, Berkshire could buy three
Burlington Northerns (at $15.9 billion in cash each) and still have more than $10 billion left over
to buy back stock while retaining $20 billion in cash on the balance sheet. It`s simply
remarkable.

We interpret today`s announcement as not only a bullish statement by BuIIett regarding
Berkshire`s stock, but also about the markets in general because BuIIett wouldn`t even consider
buying back his stock if he thought there was even, say, a 20% chance that the world and major
stocks markets were going to go off a cliff, as they did in late 2008 and early 2009. At that
time, he was able to invest more than $50 billion at distressed prices, which Buffett much prefers
to buying back his own stock, so Buffett is clearly saying that he thinks we`ll muddle through
and that a major market correction is quite unlikely.

-19-

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