January 20, 2006

Dear Clients and Friends,

I wanted to give you an update on our investment views and philosophies. At some point in the near future, I would like to write a detailed letter to all of you explaining some of my thoughts. The following are excerpts from our website https://www.rbcpa.com. I try to keep the website somewhat up to date. The site gives readers an idea of our philosophies.

We greatly appreciate the continued confidence you have placed in us. We have enclosed your 2005 portfolio reports. When you look at your portfolio reports, please pay most attention to the first column on the last page (“Portfolio Performance.”) The last page, gives you your total Return On Investment (ROI) since you joined us. You might notice that we listed “Management Fees” in this performance report. All fees paid out of the reported account are computed in your investment returns. The returns are presented as total returns, time weighted returns and annualized returns. We also supply some comparative indexes and/or funds. It is of my opinion that the Vanguard Balanced Index Fund and Fidelity Global Balanced Fund are the benchmarks we should be measured against.

In the text below, on our website, and in discussions you may have had with me, you will notice the following common themes we use in investing:

1. Patience – portfolios, like children, take time to nurture. We are typically purchasing investments, which are being shunned by Wall Street. Examples of these types of purchases during 2005 included Pfizer, Merck and AIG.

2. Drops in share prices are welcome – We prefer to have the prices of our shares that we are accumulating to be dropping and not rising. Keep in mind; we typically follow the companies that you own rather closely. If the share prices of any of these companies was to materially decline , we would probably look to increase our positions in these companies. We would welcome a market drop in the same fashion that a skier welcomes the winter snow. We hope that you all will be able to tolerate the psychological difficulties of bear markets. If you feel you will have difficulty with that philosophy, please call me, IMMEDIATELY.

3. I eat my own cooking. – I manage my portfolios and my family’s portfolios in the same manner as I manage yours.

4. We are focused on the long term. – Again, we are not concerned with short-term performance. Our portfolios should be judged by performance of at least 3 – 5 years. We are focused on portfolio positioning and not short-term portfolio performance.

5. I constantly study the likes of Benjamin Graham, Marty Whitman, Marty Zweig, Warren Buffett, Charlie Munger and so many others. I spend my days and nights reading and studying. The goal of such is for the knowledge gained to be passed onto our portfolios.

Please email me with any thoughts, concerns, ideas and so forth. Investing is a teamwork approach, and your input is incredibly valuable to the management of your portfolio. I can be reached at [email protected]. Perhaps we don’t have your email. If that is the case, please send me an email, and I will put you in my address book.

Again, thank you so much for your support. We greatly appreciate it. We hope you all have a healthy and happy 2006 and beyond.

Very Truly Yours,


Ronald R. Redfield, CPA, PFS


The following are excerpts from 2005 postings to our website.
Goals for 2006:

1. Try to minimize use of short positions. Although this has been extremely profitable for us and gives a hedge to our longs, I am uncomfortable with the tax consequences, as short sales are always treated as short-term gains.

2. Try to keep stock sales at a minimum and reduce turnover. Our turnover is already fairly low. Our goal for turnover of stocks is to be consistently less than 10 – 20 %. Our research will dictate the turnover, and we will not hold a stock, only because of a desire to have low turnover.

3. Keep reading and learning and most importantly, keep doing what I am doing. I am feeling real good about our research and our portfolio management. I have never been more comfortable with our research and execution. I think I am an investor who knows “thyself.”

4. Increase assets under management – I guess that is what we all try to do. With this goal in mind, please understand that we prefer that the prices of shares, which we are accumulating, are dropping in price. This “hope” is contrary to our goal of increasing assets. Most importantly, we really aren’t performance oriented, and our long-term approach welcomes buying opportunities. We will always be focused on portfolio composition as our highest priority.

5. Meet our Charlie Munger – Can’t rush these things, but we certainly wouldn’t mind a partner in thought and such. This has been a goal of mine for sometime now (probably over a decade.) With this said, the following discusses a Warren Buffett (Charlie Munger’s partner) interaction, which can be found in the book, “Trade Like Warren Buffett.” I enjoyed the letter that Buffett sent back to Monish Pabrai, in regards to a request for employment and learning under Buffett. Allegedly, Buffett responded (hmm, sounds like a quote from the book “Is your mama a llama?”). “Look, I work alone, and the kind of position you seek does not exist at Berkshire”. “Good luck reorganizing your life; I’m not the answer.” I liked that. I don’t know why. Maybe one day i will meet my Munger.

6. Follow the leaders – What I mean by this is to keep honing in on my style, not shifting, just refining and growing. I have learned so much from studying Buffett, Munger, etc, etc. I learned about 15 years ago from listening to “Psychology of Success”, by Brian Tracy the following. If you want to be successful, read an hour a day. Read about something you love in your career and focus on it. I am so thankful I did that. I lost sight of the hour a day, and made it probably an average of 40 – 60 hours a week. Yet, no regrets, I’m having a blast. I feel like I am playing backgammon or Risk all day, and getting paid to do what I would do for fun anyway. Following the leaders to me means, study the investors I admire and are within my competence and philosophy, and just keep learning.

7. Try to have as few positions in our portfolio as possible. I would ideally like to have 8 to 10 common stock positions. We currently have around 18 – 24 positions (some are small positions (1%). Our largest holding is around 8% position, second largest around 7%, we have a handful at 5% and the rest are just hanging at 2 to 4%. Realistically, I could see our positions becoming less than 15 – 20 this year.

Guidelines for selecting an investment advisor (This was copied from a book called “The Tao Jones Averages.”)

1. Insist on meeting with the individual who will be managing your account. It is often his judgment that will be the key ingredient in what happens to your portfolio, since in most investment organizations, investment recommendations are suggestions that the staff may or may not follow. This person’s judgment is the main thing you are paying for.

2. Ask what role personal judgment plays in the individual’s decisions, as well as the firm’s overall investment philosophy. Avoid those who use investment strategies that rely too heavily on mechanical methodology.

3. Avoid “investment scholars.” If an investment counselor is too articulate, if he creates a barrier of words you can’t understand, be careful: Conversely, if he or she is not unduly articulate and uses feeling and sensing words, look at this tendency as one indication of right-brained thinking.

4. Be sure your account is meaningful-to the investment manager. If your account is small, find a small-size management firm or your money will become only an account number on a computer printout. Big is not necessarily beautiful; having a large research staff not only does not guarantee good investment judgments, it often serves as a poor substitute.

5. Ask what mistakes the investment adviser and his firm have made. There is an ancient Chinese saying, “One disease, long life; no disease, short life.” If a person has had a disease, a warning, then he will take care of himself and increase the odds of living a long life. Likewise, if an investment adviser has not yet made major errors, be careful, as he or she is probably getting close to perfecting the art of going wrong with confidence–something you do not want someone to do with your money.

6. Don’t be overly impressed with investment firms that have had highly successful investment performance records within the recent past. You might be giving money to an organization that is so happily riding the last trend that they will be the last to admit when the trend is ending.

7. If your investment adviser plays golf, ask him what his handicap is. If it is under six, be careful; the chances are he is either lying or spending far too much time on the golf course.

8. Try to determine how whole brained the investment adviser’s philosophy and procedures are. Over the long run, balanced investing is the best investing.

9. Once you select an investment adviser, give him a fair chance. For the first five years the Dallas football franchise, under Coach Tom Landry, had losing seasons. Upset about negative fan reaction, one club official approached owner Clint Murchison about the unrest of the fans. Clint told the official to give Coach Landry a ten-year contract, as that should keep the fans quiet.

Some portfolio and investment thoughts: (September 15, 2005)


a. We try to keep portfolio activity to a minimum. We believe that less trading is preferred to frequent trading. With that said, clients of ours will notice that our portfolios are being repositioned more aggressively during the last few weeks. This repositioning will continue as our research evolves.

b. We have eliminated several of our longer-term positions. Please call us or email us if you are a client of ours and would like to discuss the theories of these changes.

c. Our fixed income positions will always have greater trading frequency. Typically these positions are temporary in nature. They are temporary for various reasons. Sometimes we feel they are bargains at certain prices and will buy while we perceive that bargain exists, and at other times we will sell when we feel that the “bargain” has subsided. We also might sell for reasons of freeing up cash for other longer-term positions.

d. Remember, we are long-term investors! We are focused on portfolio positioning and not portfolio performance.

e. We attempt to be tax efficient. Over the years we have been successful in tax efficiency. We do not currently have many tax losses available for our clients that have been with us for a longer period of time. Hence, portfolios might feel a bit of a tax bite this year as compared to previous years. Nevertheless, we are always focused on tax efficiency. This is evident in our typical “buy and hold style”. Buying and holding gives us the ability to generate preferential long-term capital gains. If you have questions on your portfolio in this manner, please just let us know.

A Letter to Clients we never sent, dated May 12, 2005

We appreciate the continued confidence you are placing in our firm. Our intent is to always handle your investments with care, diligence and competence. This note will identify our current investment and portfolio thoughts. Please visit our website www.rbcpa.com for continued updates. If you do not have access to the web, please just call. We could always fax or mail you our recent writings.

If mid term interest rates rise, fixed income investments will fall in value. Please keep in mind that 10-year rates are relatively unchanged since Mr. Greenspan has started raising short-term rates. Over this same period, the discount rate has risen from 2.50% to 4.00%. We do not pretend to know where rates are going. With that said, we continue to focus on shorter-term durations and also focus on bonds of high credit quality. We will not time the market. Our fixed income exposure is at the lowest levels since our inception. You will notice that our fixed income components are traded in a more frequent manner than our core investments. This frequent trading of our fixed income investments is based on several reasons:

A. We see income opportunities elsewhere. This is often based on pricing and our interpretation of value.

B. We often buy fixed income components as a temporary position. Typically a fixed income investment will be sold in an effort to reallocate capital.

We have reduced our allocation to petroleum during this run up of oil prices. We were not comfortable with the current valuations of our oil holdings.

We are focused on a handful of companies. These companies often have strong fundamental financial structures. The companies often pay a dividend. We attempt to invest in companies where we trust the management. Often but not always, if our views of management turn negative, we will sell our position.

Currently, approximately 50% of our entire typical portfolio is made up of about 10 companies. If you would like to discuss our reasons for ownership, or any of your views on theses companies, please just let us know. When we invest in common stocks, we are typically long-term investors. We do not believe that we can predict short-term price movements of a company. Historically, we have bought companies during a period falling stock prices. Historically the price continues to go down during our “accumulation stage.” This is a text book value investor scenario of buying on bad news, or falling prices. Our typical allocation to common stocks is at its highest point since our inception. (Incidentally, this is still the case during on this date January 11, 2006. Please call me if this is a concern of yours).

We like to understand the fundamental aspects of a company we invest in. We like to project future earnings, cash flows and business continuity. We like to tear apart company’s financial statements. Much of this type of analysis is currently available on our website. We realize that our analysis is ever changing and we attempt to adjust to these changes. Generally the process is an adjustment of our mid-term to long-term valuations of these companies.

We continue to carry precious metals as a small part of most portfolios. Our precious metals allocations are also near our historic lows. This allocation is based on interpretation of value. The contrarian philosophy in our investment discipline has caused us to retreat from our previous overweight position in precious metals. (Please keep in mind that we eventually eliminated our precious metals position later in the year 2005).

We often study the financials of a company extensively. We look to find potential areas of concern in the financials. We use our accounting background to attempt to formulate our financial statements analysis. We often continually look for errors in our analysis and our interpretations of value. We are not at all embarrassed or ashamed to admit errors.

Although investing with us has generally provided positive returns in a consistent fashion over the last 10 years, we are not immune to losses. We do not view portfolio declines as broken investing. We often view declines in prices of companies as a welcome event. While declines occur, your portfolio may be guilty of lack of performance, as well as generating negative returns. When this occurs our firms revenues will also decline.

I am currently reading a book to my 6-year-old son. The book is about forest fires. The book explains how forest fires are often caused by nature. The book explains that natural forest fires are actually a fertilizer for future growth. We view value investing is a similar view.

We ask that our clients judge our performance over the long term. If you worked with us since 1995, you will recall that our approach to investing, as well as our philosophies, have not shifted over the years. We consider long term investing to be a 5-year or longer period. We plan on continuing to invest our monies in what we consider to be a value approach. We will continue to exercise doubt, scrutiny, responsibility and respect in our decisions.

Thank you very much for reading this letter. Please call or email us with any questions, comments, concerns or such. [email protected]