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Letter dated November 3, 2008 updating events of October 2008

October was a very difficult month, but we were quite conservatively postured through it. I won’t go into a very detailed analysis of economic and market forces in this letter; rather I’ll keep the focus on how we managed your money. As the market began the most severe part of its decline during the first full week of October, we had your account at xx% cash. By month-end, we had reduced your cash level to xx%. The S&P 500 Index lost 16.8% for the month, and your account was down 15.27%. At the close on October 27, which was the worst part of the month, we were 3.65% ahead of the S&P. We lost some ground on a relative basis in the final few days as the market rallied. In sum, our conservatism kept your account ahead of the market during the downturn. Even though we made some great buys near the lows, our focus on capital preservation put a limit on our gains when the market initially rallied back.

There is no ignoring the seriousness of this decline. The market’s action was as bad as in the autumn of 1931. Yet it can also be compared to the Panic of 1907 when a liquidity crisis caused a 50% decline in the stock market, which turned out to be an enormous buying opportunity. Some think the closest parallels are to the Panic of 1873, where a mortgage crisis in Europe was a contributing factor; see, e.g., http://www.onlineeducation.org/1873-Panic.

There is always a tension between valuation and the economic outlook. At the lows of October 2002, Value Line thought the market would appreciate by 100% over a three to five year time horizon. Their model tends to be quite good over long time horizons, and was in that case. Now Value Line sees 160% appreciation in the next 3-5 years.

Even in 1931, the market stabilized in November. As noted above, we have made some new investments in the past week or so and will continue to evaluate whether the worst economic scenarios are already discounted in stock prices. Our purchases were often stocks with very high yields. Pipeline companies such as Kinder Morgan or Enterprise Products had yields north of 8% and are relatively insensitive to economic cycles. Mack Cali will certainly have higher vacancies, but the stock fell to levels not seen since 1995 and yields over 11%. We are also over-weighted in energy stocks, which hurt a bit in the last three months. But the assets are real, and most analysts think that supplies will diminish.