Exerpt from 2010 Second Quarter Letter to Clients

Appended to this letter is a summary on the lion’s share of topics that seem to be keeping people up at night. Please call to discuss these any of these issues or to offer additional comments. Last quarter we communicated our expectation that above consensus economic growth would probably materialize in 2010, and at least through the first quarter, this has been dead wrong. Our optimism came from the close contacts we keep with the companies we follow which usually we expect to grow sales at around two and a half times the rate of GDP growth. We have been encouraged by sales growth for the companies we follow, yet first quarter GDP growth was a puny 2.7%. There seems to be one simple explanation for sales growth of our portfolio companies vaulting to more than five times GDP growth: the companies we follow generally dominate their industries. And as we have said time and time again, the strong should emerge from the crisis even stronger at the expense of weaker, more poorly run competitors.

Presumably individual investors are taken by the numerous circulating comparisons to the 1930s and general uncertainty because money continues to flow out of stock mutual funds and into bond mutual funds. Historically their timing is so bad that this is good news for long term investors who can stomach taking an unpopular contrarian view. At the pit of the depression in 1932, President Hoover enacted the largest tax increase in US history; for example, the top marginal tax rate was increased from 25% to 63% - and President Roosevelt later increased it to 79%. Smoot-Hawley increased tariffs on international trade and the economy suffered mightily for these government policy errors. In our opinion the sum total of effects of policies that President Obama has considered would not hold a candle to the policy errors in the 1930s. It is worth further mention that President Obama has been woefully unsuccessful in many critical policy endeavors.

In summary, we view the current situation and market conditions in a favorable light and look forward to catching up with you soon.