July – September 2009

October 31, 2009

Dante Alighieri (1256-1321) was a Florentine statesman and poet, who wrote ‘The Divine Comedy’ – one of the finest pieces of literary work. There were three sections of journeys through ‘Inferno’ (or Hell), ‘Purgatory’ and ‘Paradise’.

Being lost in the woods and seeking to find the path again, Dante wrote

‘Midway upon the journey of our life

I found myself within a forest dark,

For the straightforward pathway had been lost.’

So much of what is happening in the global economy today resembles the meanderings in a dark forest with the straightforward path lost. As a result, we are staring at ‘Hell’ in its nine circles – without confronting the nine-level mountain of Purgatory, it would be impossible to achieve Paradise. Simple shortcuts, like printing notes, is not the path to Heaven – in fact, it is one more step down into Hell!

Let me comment on some of the recent purchases. Most are special situations, which means that the price movements will depend primarily on events such as open offers or buybacks as a prelude to potential delisting. Given the high valuations of the market, we are comfortable with moderate but highly probably upsides in contrast to those that are uncertain.

Many of the purchases we made earlier during the year and in the last quarter were of companies with otherwise excellent track records which were facing the wrath of the markets because of temporary misfortunes. Since we buy ‘normalized’ earnings power and not last quarter’s annualized earnings, we look upon such opportunities as veritable gifts from ‘Mr. Market’. In fact we pay a lot of attention to him only when he is in a generous mood, either in selling securities or buying them from us.

A lot of Mr. Market’s generosity in the future is going to depend on how and when his pockets are filled or emptied. Whilst we make no attempt to predict the flow of liquidity into the markets, excessive flows of cash into the markets do make us cautious. For at that time, inscribed over the gates of Mr. Market should be the same words that were inscribed over the gates of the Inferno.

‘All hope abandon, ye who enter here.’