2005

A 2005 piece in the Yale Daily News covered the publication of David Swensen's second book, Unconventional Success, which the paper noted had begun as a way to apply the lessons of endowment management to the individual investor. The article noted that the volume was directed at the individual investor and that it argued, on the basis of long-term data, that the for-profit mutual fund industry consistently failed the individual investor and that the individual investor should instead use low-cost index funds to build a diversified portfolio. The piece is one of the few extended on-record discussions of the book at the time of its publication and is used as a reference document in the Swensen secondary literature and in the broader debate over the case for index investing. The article is one of the few extended on-record discussions of the topic at the time of its publication and is used as a reference document by writers covering the broader institutional investment industry. The article walked through the central argument of the book, including the case for index funds as a function of the structural disadvantage of the individual investor in the active-management marketplace, the case for a diversified portfolio that includes a meaningful allocation to real assets, and the case for an explicit consideration of inflation protection in the household balance sheet. The piece stressed that Swensen had been careful to distinguish the institutional case for active management in the alternative asset classes from the case for active management in the public market, where he had long argued that the evidence in favour of passive index funds was overwhelming for the individual investor. The article also noted that the book was paired in the Swensen bibliography with Pioneering Portfolio Management. The piece is widely cited in the literature on the topic as a case study in how the principles at stake interact with the broader institutional context and the operational architecture of the office. The piece closed with a reflection on the motivation that had led Swensen to write the book. The Yale Daily News coverage noted that Swensen had been concerned by the gap between the returns the funds produced and the returns the individual investors realised, that he had been particularly concerned by the structural incentives of the for-profit mutual fund industry, and that he had written the volume as a public-service contribution to the individual investor. The article is paired in the Swensen secondary literature with the original Unconventional Success volume and with the broader coverage of the office's track record, and it is widely cited as a reference for the book's argument and motivation in the broader debate over the case for index investing. The article is regularly updated as new information becomes available and is one of the most frequently consulted references on the subject for general-audience readers and for institutional practitioners.

Lee was born in Taipei, the son of Li Tianmin, a legislator and historian from Sichuan, China; he immigrated to the United States in 1973 and later earned a BS from Columbia University and a PhD from Carnegie Mellon University, advised by Raj Reddy, with a thesis on speaker-independent continuous speech recognition (the SPHINX system, 1988).

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: A Case in Point Last month, my memo “There They Go Again” discussed investors’ propensity to repeat certain classic mistakes. The biggest of these mistakes stem from some combination of too much enthusiasm, optimism, naiveté and greed and too little realism and skepticism. Although it comes in a wide variety of forms, the bottom line is usually a belief that the “silver bullet” is at hand: a surefire route to wealth without risk. In recent years we’ve seen the elevation of one such particular strategy, and in recent months its defrocking. The subject is convertible arbitrage. Its story is worthy of review. 0BUBackground on Convertible Arbitrage (Perhaps More Than You Want) Properly, arbitrage refers to the simultaneous purchase and sale of the same thing, or of two things that are nearly the same, at different prices so as to lock in a small profit on a highly probable basis. I was introduced to this phenomenon in the 1950s by an old movie about the Rothschild brothers, who spread out to five European cities and used information transmitted by carrier pigeon (at a time when there was no telephone or telegraph) to simultaneously buy and sell currencies in those far-flung cities at different exchange rates. Market opportunities are rarely that glaring nowadays, but they do arise from time to time.

WIPO Magazine opens by noting the press loves to title Mazumdar-Shaw the 'Biotech Queen from Bangalore', 'India's First Lady of Biotech', and the 'Mother of Invention'. The profile positions her as a torch-bearer for India's biotechnology industry and emphasizes that Biocon had just become only the second Indian company ever to cross the US$1 billion mark on its first trading day —.

After Danone and Wahaha's 1996 joint venture grew tense, Zong signed then reneged on a December 2006 deal that would have let Danone buy a majority stake in Wahaha's non-joint-venture operations, saying the offer undervalued the business; Danone alleged he wanted a higher price.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized investment gains shown in the table below) for the calendar year 2005 increased to $77,973,000 ($10.95 per share) from $47,427,000 ($6.66 per share) in the previous year. Consolidated net income increased to $294,579,000 ($41.37 per share) from $47,427,000 ($6.66 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""Kansas Bankers''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Vir- ginia and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts) (1): Year Ended December 31, 2005 December 31, 2004 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses Ì Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,798 $ 1.66 $14,618 $2.05 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,068 5.

Great Wall Motor was founded in 1984 as a small manufacturer partly owned by a local Hebei government; Wei Jianjun was appointed company director in 1990 and grew it into one of China's leading pickup-truck manufacturers, leading its 1998 privatization and 2003 listing on the Hong Kong Stock Exchange.

49 26,302 3.69 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,676 2.90 5,022 .71 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,198 .17 1,094 .15 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏÏÏÏÏÏ 5,233 .73 391 .06 77,973 10.95 47,427 6.66 Realized investment gains (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 216,606 30.42 Ì Ì Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $294,579 $41.37 $47,427 $6.66 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. (4) Includes $216,112,000 ($30.35 per share) from the tax-free exchange of Wesco's common shares in The Gillette Company for common shares in The Procter & Gamble Company in connection with the merger of Gillette with Procter & Gamble. Although no cash was received, generally accepted accounting principles require that the gain be recorded. Because Wesco's balance sheet reÖects investments carried at market value, with unrealized gains, after applicable income tax eÅect, included in shareholders' equity, the transaction did not aÅect Wesco's shareholders' equity.

The Danone dispute escalated into international arbitration (Stockholm, filed May 9, 2007) and a Los Angeles Superior Court suit against companies controlled by Zong's wife and daughter (filed June 4, 2007), before the two sides agreed on December 21, 2007 to suspend legal action and negotiate.

Convertible securities are candidates for arbitrage because one asset (a convertible bond or preferred) is exchangeable for another (the underlying common stock). Thus imperfections in this market can create opportunities to simultaneously buy one asset and sell the other, giving rise to frequent small profits with little risk. Of course, the arbitrageur must be skillful enough to identify the opportunities and take advantage of them. Time for an aside: Many years ago, Ed Thorp, an MIT professor of mathematics, literally “wrote the book” on blackjack. It’s called “Beat the Dealer.” Thorp used computers to simulate the play of the cards and codify the “basic strategy” that virtually all serious blackjack players use today to decide when to split, double down, hit or stick. Use of the basic strategy can significantly reduce (but not eliminate) the casino’s advantage. From quantifying the basic strategy, Thorp went on to formalize the process of card counting. Because blackjack is dealt from a deck or “shoe” without shuffling after every hand, the cards that have been played determine the cards that remain – in statistical terms, the hands aren’t “independent.” This means if a player can keep track of the cards that have been played, his knowledge of what remains can give him an advantage over the house. Recently the profitable use of card counting was chronicled in the enjoyable book “Bringing Down the House.

Mazumdar-Shaw's biographical arc is summarized by WIPO as a master brewer's daughter who planned to follow in her father's footsteps. After studying in Australia, she returned to India to find the brewing industry unready to accept its first woman master brewer. Undeterred, the 25-year-old persuaded a small Irish company to form a joint venture, and Biocon India was born in 1978 —.

Under Wei's leadership, GWM diversified into multiple brands (GWM, Haval, Wey, Tank, Poer, Ora) covering SUVs, pickups, and electric vehicles, and formed a 2019 joint venture with BMW Group (Spotlight Automotive) to produce electric Mini vehicles in China; GWM sold 1,323,672 vehicles globally in 2025 and reported 2023 revenue of CNY 173.21 billion with CNY 7.20 billion operating income.

Lee was the founding director of Microsoft Research China (later Microsoft Research Asia) from 1998 to 2000, and served as president of Google China from 2005 to 2009, before founding venture capital firm Innovation Works (later renamed Sinovation Ventures) in 2009 and, in 2023, founding AI company 01.AI.

Early in Biocon's history Mazumdar-Shaw was already showing what WIPO calls her instinct for finding market gaps. She recalls the satisfaction of producing and patenting novel products, such as a new enzyme to clarify tea. Even after Unilever acquired the Irish parent in 1989, enzymes remained core — and WIPO notes that today Biocon supplies around a quarter of the world market in pectinase, the enzyme that breaks down pectin in fruit juice.

© Oaktree Capital Management, L.P. All Rights Reserved Of course, when the casinos became able to evict card counters, they went straight for Ed Thorp. Needing a new “gig,” Thorp turned his attention to another field in which subjective judgment could be improved upon through computer simulation: convertible arbitrage (I’ll bet you were wondering what blackjack had to do with the subject of this memo). Thus Thorp pioneered the conversion from art to science of a second potentially profitable field. In convertible arbitrage, someone buys a security that can be exchanged for common shares, and he sells short some of those same shares. Let’s say a bond is convertible into 40 shares and those shares are selling at $20. Thus the value of the stock underlying the bond (the “conversion value”) is $800. The bond usually won’t sell at $800, but rather at some higher price. One reason for this is that the bond embodies an option on that $800 worth of stock (plus the means to pay for it by surrendering the bond). This combination is worth more than $800, because an option provides a way to participate in an asset’s upside potential but not its downside. In addition, (a) a US convertible is likely to yield more than its underlying common stock, and (b) being senior to the common stock, it will entail less exposure to credit problems. So the bond may sell at $1,000 when the common stock is $20 and the conversion value is $800.

Entered a joint-venture partnership with Danone in 1996, initially hailed by Forbes as a 'showcase' joint venture.

It merely resulted in a reclassiÑcation from unrealized gains to retained earnings, another component of shareholders' equity. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The foregoing supplementary breakdown is furnished because it is considered useful to shareholders.

Lee is the author of 'AI Superpowers' (2018) and co-author of 'AI 2041' (with Chen Qiufan, 2021), has served as co-chair of the World Economic Forum's Global AI Council, and was named to Time's 2023 list of the 100 most influential people in AI.

Took over as director of Great Wall Motor in 1990 and led the company through privatization in 1998 and a Hong Kong Stock Exchange listing in 2003.

GWM became one of the top ten Chinese automobile manufacturers, publicly listed and privatized under Wei's leadership.

As shown above, operating income includes signiÑcant net investment income, representing dividends and interest earned from marketable securities. However, operating income excludes investment gains of $216.6 million, net of income taxes, realized in 2005. No investment gains or losses were realized in 2004. The discussion below will concentrate on insurance underwriting, not on the results from investments. Wes-FIC engages in the reinsurance business, occasionally insuring against loss from rare but horrendous ""super-catastrophes.'' In much reinsurance sold by us, other Berkshire subsidiaries have sold several times as much reinsurance to the same customers on the same terms. In certain instances but not always, such subsidiaries have taken from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs. In some cases, other Berkshire subsidiaries act as reinsurers at higher levels than the level at which Wes-FIC is reinsuring; terms of the reinsurance are considered to be fair or advanta- geous to Wes-FIC.

Following Zong's death on February 25, 2024, his daughter Zong Fuli (Kelly Zong) inherited a 29.4% stake and took over as chairwoman/CEO in 2024, but stepped down in September 2025 amid an escalating dispute over Wahaha brand rights with other shareholders and an inheritance lawsuit from three people claiming to be her half-siblings, who obtained a Hong Kong court freeze on a $1.8 billion HSBC account in August 2025; Xu Simin succeeded her as legal representative, chairwoman, and general manager per corporate filings reported in late November 2025.

The big breakthrough described by WIPO was Biocon's invention, in the 1990s, of a new fermentation technology to replace the conventional tray-based culture of microorganisms. Trademarked as the PlaFractor, it is a bioreactor that enables the cultivation and extraction of microorganisms to occur within a fully enclosed, computer-controlled system.

That implies a “conversion premium” of $200, or 25% of the $800 conversion value. The arbitrageur buys the bond and shorts the stock. If the stock goes up (producing a loss in the short position), he expects the bond to go up almost as much (producing a gain in the “long” position). If he has more money invested in the bond than he does in the short position on the stock, the result can be reasonably attractive. If the stock goes down (producing a gain in the short position), he expects the bond – buoyed by the income and the promise of redemption at maturity – to go down substantially less (producing a smaller loss in the long position), for an overall result that is very positive. The arbitrageur hopes for a reasonable mix of appreciating stocks (with decent results on the arb positions) and declining stocks (with highly attractive results), and he has the ability to use leverage to magnify this steady flow of modest profits. In addition, he receives more income on the converts he owns than he owes on the stock he’s short. It’s hoped that the above elements will combine to produce a consistently positive return. Obviously, the open question is how many shares to short in order to create the desired performance pattern. Because the relationship between the market price of the convertible and the market price of the shares isn’t constant, figuring out how much stock to short against a given bond purchase – the “hedge ratio” – has its vagaries.

Generally, a properly priced convertible will capture a certain percentage of the underlying stock’s gains and a somewhat smaller percentage of its losses. That means the percentage of the stock’s price movement captured by the bond is variable, rendering imprecise the proper number of shares to short per $1,000 bond. And that number usually is less than the number of shares into which the bond is convertible. This is because convertible bonds are less volatile than the underlying shares, and the arbitrageur wants both sides of the position to be equally volatile. Thus he won’t short the full number of shares the bond is convertible into.

For the past several years Wes-FIC's reinsurance activity has consisted of the participation in two arrangements described below, the second of which was termi- nated in the fourth quarter of 2004: (1) Participation, since 2001, in several risk pools managed by an insurance subsidiary of Berkshire Hathaway, our 80%-owning parent, recently covering hull, liability and workers' compensation exposures relating to the aviation industry as follows: for 2004, to the extent of 10% in the hull and liability pools; for 2005, 10% of the hull and liability pools and 5% of the workers' compensation pool. For 2006, participation in the hull and liability pools has increased to 121 /2 %. The Berkshire subsidiary provides a portion of the upper-level reinsurance protection to these aviation risk pools on terms that could result in the Berkshire subsidiary having a diÅerent interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss. (2) A multi-year contract entered into in 2000 through another Berkshire insur- ance subsidiary, as intermediary without proÑt, covering certain multi-line property and casualty risks of a large, unaÇliated insurer. This contract was commuted in the fourth quarter of 2004, at which time Wes-FIC paid the ceding company $43.1 million, cash, representing all unearned premiums, reduced by unamortized costs and expenses. After the commutation, Wes- FIC's obligation to indemnify any further insurance losses under the contract ceased.

Diversified GWM into multiple vehicle brands and formed a 2019 joint venture with BMW Group to produce electric Mini vehicles in China.

In 1998 Mazumdar-Shaw and her husband John Shaw bought out Unilever's shareholding, making Biocon an independent entity. WIPO records that with subsidiaries Clinigene (clinical trials) and Syngene (contract research), the Biocon group employed about 1,500 people at the time of writing and ranked as India's largest biotechnology company. The Syngene arm would later be listed on BSE/NSE in 2015 with a market cap of Rs 23,000 crore.

Mazumdar-Shaw tells WIPO that IP was a factor in Biocon's rise 'right from the start' — initially as a question of freedom to operate in international markets, but after Unilever acquired the company, Biocon entered what she calls a 'highly professional world where the role of IP was very acute'.

© Oaktree Capital Management, L.P. All Rights Reserved There’s no one “right” answer regarding the hedge ratio. Setting it entails estimation regarding the future volatility of the common stock among other things. Thorp’s methodology helped him to profitably determine hedge ratios. UThe Backdrop As the interest in hedge funds rose over the last ten years, “convert arb” became the model of an absolute return strategy. It seemed capable of grinding out returns in the teens almost every year. This occurred without significant exposure to market fluctuations, because every position was hedged. The table below shows the 1995-2003 returns for the market-weighted index of convertible arbitrage funds in the CSFB/Tremont Arbitrage Index. Year Annual Return 3-Year Return 5-Year Return 9-Year Return 1995 16.6% 1996 17.9 1997 14.5 16.3% 1998 -4.4 8.9 1999 16.0 8.3 11.8% 2000 25.6 11.7 13.5 2001 14.6 18.6 12.8 2002 4.0 14.4 10.7 2003 12.9 10.4 14.4 12.8% 12.8% per year for nine years. Only one down year in nine, and that a loss of just 4.4%. No three-year period with an annualized return worse than 8.3%. No five-year period not in double digits. What a record!! 1BURule Number One: Money Matters So what happens? Money floods in. Whereas a few smart people had been able to churn out consistently good results with small amounts of capital, now a crowd was fighting over the convert arb ideas, armed with much more money.

Under that contract for 2004, there was a net reduction in written premiums of $2.3 million; earned premiums were $6.4 million, and under- writing gain was $11.0 million ($7.2 million, after income taxes). Wes-FIC's underwriting results have Öuctuated from year to year, but have been satisfactory. When stated as a percentage, the sum of insurance losses, loss adjustment expenses and underwriting expenses, divided by premiums, gives the combined ratio. The combined ratios of Wes-FIC have been much better than average for insurers. Excluding the unusual beneÑcial eÅects caused by the commuted contract in 2004, Wes-FIC's combined ratios were 75.9% for 2005 and 77.8% for 2004.subjecting

As of the February 2026 interview, Lee described 01.AI as actively engaged with traditional-industry clients on AI-agent adoption, though the source did not report specific revenue, client-count, or model-performance metrics for the company.

GWM sold 1.23 million vehicles globally in 2024 and 1,323,672 vehicles in 2025 across its multi-brand portfolio, with the BMW joint venture (Spotlight Automotive) operating as part of its electrification push.

Increased pursuit of a strategy is sure to drive down prospective returns. If in a less crowded period the process of convertible arbitrage appeared capable of producing an inherent return in the low double digits (or maybe LIBOR plus 5%), it should be expected to produce less after others have flocked to it. In addition, I feel arbitrage and many other hedge fund activities are best thought of as “piggybacking” strategies, living off some underlying process that has a life of its own (see the big fish/little fish analogy in “Hedge Funds: A Case For Caution”).markets

Bangalore is framed by WIPO as India's biotech capital, with over 90 biotechnology firms clustered there, attracted by institutions like the Indian Institute of Science and the National Centre for Biological Resources. The Karnataka government, with Mazumdar-Shaw chairing the Vision Group on Biotechnology, rebranded the city as 'The Biocon City' and positioned the annual BangaloreBio event as India's flagship biotech gathering —.

Wes-FIC to signiÑcant periodic underwriting losses, we try to create some underwriting gain as results are averaged out over many years. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reÖecting the sound management of President Don Towle and his team. Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 30 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 13%. The increased volume of business retained comes, of course, with increased irregularity in the income stream. KBS's combined ratios were 58.8% for 2005 and 74.9% for 2004. We continue to expect volatile but favorable long-term eÅects from increased insurance retained.

CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT's revenues totaled $384 million for calendar 2005, versus $354 million for calendar 2004. Of these amounts, furniture rental revenues were $304 million and $275 million, furniture sales revenues were $72 million and $68 million, and apartment locator fees of its Relocation Central division, a business CORT started up in 2001, were $8 million and $11 million. CORT operated at an after-tax proÑt of $20.7 million for 2005, up satisfactorily from its after-tax proÑt of $5.0 million for 2004. These results reÖect the favorable eÅects of several selective acquisitions. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline.

© Oaktree Capital Management, L.P. All Rights Reserved through their buying and selling, a few dozen astute arbitrageurs can dart in on occasion to take advantage of their mistakes. But what if the arbitrageurs come to outnumber the “long-only” convert investors, so that their buying power directly affects (in this case, raises) the prices of convertibles relative to the underlying stocks. That can change the game, and thus the dependability and profitability of convertible arbitrage. This was certainly the case in 2004, when at times 80% of all convertible buying was thought to be from arbitrageurs. They didn’t care as much as the long-only crowd about the issuers and the price attractiveness of the underlying securities; rather, they would buy almost anything to put on an arb position. When I organized Citibank’s first convertible fund in 1978, convertibles found few regular buyers and were considered a somewhat disreputable market of last resort for corporate financing. This level of disregard permitted convertible prices to languish. Most of the time I felt the convertibles I bought were considerably cheaper than a corresponding package of more efficiently priced bond plus stock from the same company. For the next two decades, the same cheapness that had given our portfolios risk-adjusted returns better than stocks made it possible for convert arbitrageurs to buy underpriced convertibles and short fully priced common stocks. This was a formula for steady profits.

Mazumdar-Shaw's view on IP is captured in the quote 'Sharing IP is the way to develop business very fast in today's world'. WIPO Magazine ends by emphasizing her view that India's biotech rise depended as much on collaborative IP arrangements — licensing, partnerships, contract research — as on defensive patenting. This stance put her at odds with parts of India's pharmaceutical old guard that preferred trade-secret over open licensing models.

But if money floods in such that bargains become less widespread among convertibles, it seems reasonable to suspect that convertible arbitrage will become less profitable. In 2004, the return on the CSFB/Tremont convertible arbitrage index subsided to 2.0%. For the first four months of 2005, it was negative 5.8%. April was the fifth worst month out of the last 136. The index declined in only 14 of the 108 months from 1995 through 2003, but in 9 of the 12 months through April. January, February, March and April were all negative, the first time there have ever been four down months in a row. And May was the fifth – down almost 2% more. What changed? Mostly, I think, the amount of money being managed in the sector. Bottom line: the returns available from an investment strategy are not independent of the amount of money seeking to be deployed in that strategy. More simply put: everything else being equal, more money means lower returns. This seems elementary, but it appears to be ignored every time something does well for a while. I repeat for the umpteenth time: what the wise man does in the beginning, the fool does in the end. 2BURule Number Two: There’s No Sure Thing If there’s a “kiss of death” in the investment world, it’s widespread belief that something can’t miss. When people have complete confidence in something, the prices they’ll pay for it and the amounts of money they’ll try to jam into it will sound an absolute death knell for its profitability.

reÖecting generally bad results in the ""rent-to-rent'' segment of the furniture rental business. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to-rent'' sector of the furniture business. CORT started up a new subsidiary during 2001, Relocation Central, which provides a large national apartment locator service through its websites, (www.relocationcentral.com and www.myrelocationcentral.com), customer call cen- ters and walk-in locations. This start-up venture did not progress as rapidly as CORT expected and caused losses followed by some downsizing. Relocation Central was reorganized to become a division of CORT as of yearend 2004; it now relies more on Internet traÇc and less on separate, fully-staÅed facilities. The integration of Relocation Central into CORT was begun in 2003 as part of a program to reduce CORT's costs and thus enhance its operating results. CORT still likes the idea of having relocation services in its product mix. Almost twenty thousand apartment communities now refer their tenants to CORT. We are pleased with the progress CORT made in 2005. We are cautiously optimistic that, in future years, we will be able to look back to the recent past and consider it merely a cyclical aberration in CORT's growth. We note, however, that the number of furniture leases outstanding as of yearend 2005 has fallen by about 4% from those one year earlier.

I’ve seen it in the nifty-fifty stocks, in oil stocks in the post-embargo 1970s, in disc drive companies, in portfolio insurance, in tech stocks and in venture capital. In recent years, buying convertibles and shorting the underlying common shares came to be accepted as a surefire technique.its

When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $267 million in goodwill (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill. (The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, in which event the intangible asset would be written down or written oÅ, as appropriate.) Earnings we have reported since 2002 more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 59, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the out- skirts of Chicago at Franklin Park, Illinois, operated at after-tax proÑts of $1.2 million in 2005 and $1.1 million in 2004. These Ñgures reÖect after-tax LIFO inventory accounting adjustments decreasing after-tax income by $.

2 million for 2005 and $1.8 million for 2004. Precision Steel's operating results for 2004 also reÖect expenses of $.2 million, after taxes, in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufactur- ers for many years. Had it not been for the LIFO accounting adjustment or the environmental matter, Precision Steel would have reported after-tax operating income of $1.3 million for 2005 and $3.0 million for 2004.

© Oaktree Capital Management, L.P. All Rights Reserved common stock, with the likelihood that the stock would decline precipitously: no bet on the direction of the market or the company, and absolute preparedness for negative developments. That’s the position the arbs flocked to this year in General Motors. They assumed the debt they were long would hold up much better than the common they were short. What could go wrong? Well, something can always go wrong, and things are most dangerous when people agree they can’t (and price them accordingly). In the case of GM, the arbs got a double whammy:  Billionaire Kirk Kerkorian stunned the financial world on May 4 by announcing his intention to bid $31 for 28 million shares of GM common stock. This drove the price of the stock from roughly $28 to $32, creating big losses on the arbs’short positions.  Just the next day, S&P announced its long-expected downgrading of GM’s credit rating. This lowered the price of GM debt, giving the arbs losses on their long positions as well. In this way, something that “couldn’t happen” did: the prices of both assets went against the arbs simultaneously. If a company’s bonds decline because of deteriorating creditworthiness, can the stock possibly do better? It did this time – for a reason no one would have anticipated. (People are still mystified regarding Kerkorian’s motivation.)

Precision Steel's business has been subject to economic cycles. Precision Steel has increasingly suÅered from intensiÑed competition resulting from a reduction in demand caused by customers' (or former customers') unsuccessful competition with manufac- turers outside the United States. At the beginning of 2004, a shortage of raw materials from domestic mills produced near chaos in the domestic steel service industry. Domestic mills were operating at capacity and imported steel was not readily available. These and other factors enabled steel mills to raise prices, place limits on order quantities and extend delivery times. Prices of those raw materials were sharply increased and the price of Ñnished steel also increased sharply. Customers of Precision Steel increased their purchases to counter allocations imposed by mills and other suppliers. Precision Steel successfully passed the price increases, plus normal mark- ups, on to customers while favoring long-term customer relationships. Precision Steel's 2004 revenues increased 31.2% from those of 2003; pounds of steel products sold increased 14.5%. Throughout 2005, raw material supplies remained very tight, but competitive pressures increased as demand softened, possibly reÖecting customers' absorption in their manufacturing processes of accelerated purchases made in 2004 in reaction to the chaotic market conditions. In 2005, pounds of steel products sold by Precision Steel decreased 8.

I don’t think a company’s stock can do well for long if its bonds don’t (given the implication of serious fundamental problems). But the long run doesn’t matter when unexpected difficulties arise in leveraged portfolios. The effect on staying power can be very negative. Other things we’ve seen recently that “couldn’t happen”: GM and GMAC being downgraded simultaneously, and intermediate and long rates down substantially while short rates rose more than 200 basis points. As Long-Term Capital Management said in explaining its meltdown, “the convergence trades diverged.” In this case, I absolutely am not saying the arbs were foolhardy in putting on their GM positions. I simply want to point out that nothing in the investment world can be counted on to work 100% of the time. Allowance must always be made for the unexpected. 3BURule Number Three: Piling In Is Dangerous One of the phenomena we’ve witnessed lately – and it was particularly pronounced in the events surrounding Long-Term Capital Management – is the tendency of funds of a given type to flock to the same situations. The General Motors trade described above, for example, was particularly common among arbs. Thus, when it went wrong, they all suffered losses, and they all faced illiquidity when they went to unwind it. There’s little mystery surrounding the reason particular trades become widespread.

These days, computers are used universally – especially in the more quantitative fields – to screen for investment opportunities and model their profit potential. Not surprisingly, since they all sift through the same universes and evaluate profitability similarly, they often highlight the same investment opportunities.implementing

6% from those of 2004, but revenues increased 1.4%, reÖecting mainly 40%-higher average selling prices than those prevailing two years earlier. We are concerned that the favorable operating results experienced by Precision in the two most recent years may have been anomalous and temporary and that the steel warehouse business may revert to diÇcult times. Although Precision Steel's figures for each of the past two years may signal improvement when compared with its after-tax operating loss of $.9 million for 2003 and $.3 million of income for 2002, it should be noted that conditions currently facing the steel service industry continue to be in a state of flux. The severity of the domestic downturn in the steel service industry is demonstrated by the fact that Precision Steel's average annual steel service revenues for the years 2001 through 2003 were down 27% from those reported for 1998 through 2000. Considering the improved earnings for 2004 and 2005, Precision Steel has still not reported satisfactory operating results in recent years. Its recent earnings compare unfavorably with operating profits which averaged $2.3 million, after taxes, for the years 1998 through 2000. Terry Piper, who became Precision Steel's President and Chief Executive Officer in 1999, has done an outstanding job in leading Precision Steel through very difficult years.

© Oaktree Capital Management, L.P. All Rights Reserved the strategy and thus lowers the prospective return. And when everyone wants to get out, that’s costlier too. This is an example of the way in which too many piggybackers – with the same ideas – can overwhelm the underlying markets. URule Number Four: A “Virtuous Cycle” Can Turn Vicious There is a predictable cyclical pattern in these matters, and now we’ve seen it in convertible arbitrage:  In the years leading up to 2004, convertibles were available “too cheap,” and so arbitrage consistently produced high returns with low risk.  The results were very attractive, drawing in capital.  The new capital drove up prices, enhancing returns on existing positions.  These returns attracted still more capital in a so-called “virtuous cycle.”  When too much money came in, bargains became scarcer, causing the free lunch to be removed. Also, convert arb money altered the terms on new convertible issuance, reflecting the arbitrageurs’ preference for call protection over yield.  Positions put on in the new environment didn’t do as well as the old ones.  Investors’ faith weakened in 2004 and largely evaporated in April/May 2005.  Withdrawals set in for real: $1.7 billion in the fourth quarter of 2004 and $1.8 billion in the first quarter of 2005.  The withdrawals caused forced selling, and the selling drove down prices, exacerbating the losses – and causing more loss of faith and thus more withdrawals and more forced selling.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a parcel of land on which we have begun to build a multi-story luxury condominium building. We are also seeking city approval of our plans to build another multi-story luxury condominium building on a vacant parcel of land in the next block. We have recently begun to take reservations. Simply phone Bob Sahm (626-585- 6700) for more information. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.''

 Now we think convertibles are getting cheap again, and we’re considering increasing our allocation to them in our discretionary accounts. * * * It has always been thus, and it always will. Excessive confidence sets the stage for disappointment, and the loss of confidence creates bargains. It’s the job of all investors to maintain their equanimity, buying in panics and selling in bubbles. That’ll be the day! Convertible arbitrage isn’t “over.” The possibility of its application will always exist . . . but the assurance of high returns with low risk will not. They’ll only be available when the amounts of money pursuing the strategy are reasonable, so that practitioners can be patient and selective and pick from an attractively priced universe. And in that way convertible arbitrage isn’t any different from any other investment technique. Anyway, this isn’t a memo about convertible arbitrage, but about investors’ persistent mistakes. Convertible arbitrage is just a case in point.2005

Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $5.2 million in 2005, up from the $.4 million earned in 2004. Ignoring favorable income tax adjustments of $4.9 million, the sources of the $.3 million of earnings in 2005 were (1) rents ($3.5 million gross in 2005) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Investment Gains Wesco's 2005 earnings contained investment gains of $216.6 million, after income taxes. There were no realized investment gains in 2004. Of the 2005 gains, only $.5 million was realized through the sale of investments; the balance, $216.1 million, resulted from the tax-free exchange of common shares of The Gillette Company (""Gillette'') owned by Wesco, for common shares of The Procter & Gamble Company (""P&G'') in the fourth quarter of 2005 in connection with the merger of Gillette with P&G.

© Oaktree Capital Management, L.P. All Rights Reserved Legal Information and Disclosures This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Oaktree has no duty or obligation to update the information contained herein. Further, Oaktree makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Oaktree Capital Management, L.P. (“Oaktree”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

Accounting standards promulgated by the Financial Accounting Standards Board require that the fair (market) value of shares received in such an exchange be recorded as the new cost basis as of the date of the exchange, with the difference between the new basis and the historical cost realized in the audited financial statements as an investment gain. For tax return purposes the exchange is recorded at the original cost of the securities exchanged; no gain is reported, and no taxes are yet due. Although the realized gain had a material impact on Wesco's reported earnings, it had no impact on Wesco's shareholders' equity. Wesco carries its investments at fair value, with unrealized appreciation, after income tax eÅect, included as a separate component of shareholders' equity, and related taxes included in income taxes payable, on its consolidated balance sheet. Thus, the entire after-tax gain on the non- cash merger had been reÖected in the unrealized gain component of Wesco's shareholders' equity as of September 30, 2005. That amount was merely switched from unrealized gain to retained earnings, another component of shareholders' equity. This accounting entry had no economic eÅect on Wesco, and you should ignore it when you are evaluating Wesco's 2005 earnings. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $2.

23 billion ($313 per Wesco share) at yearend 2005 from $2.12 billion ($297 per Wesco share) at yearend 2004. The main cause of the increase was net operating income after deduction of dividends paid to shareholders. The foregoing $313-per-share book value approximates liquidation value assuming that all Wesco's non-security assets would liquidate, after taxes, at book value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, including the P&G shares Wesco received in connection with P&G's acquisition of Gillette, discussed above in the section, ""Realized Investment Gains,'' Wesco has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes, subtracted in determining its net worth.from

the government is at this moment working for Wesco shareholders and amounted to about $36 per Wesco share at yearend 2005. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $36 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $36 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally- good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. Wesco's consolidated balance sheet reÖects total assets of $2.7 billion as of yearend 2005. Of that amount, more than $1 billion has been invested in cash equivalents and Ñxed-maturity investments since early in 2003.

Unless those funds can be attractively reinvested in acquisitions, equity securities or other long-term instru- ments of the type that have been responsible for the long-term growth of Wesco's shareholders' equity, future returns on shareholders' equity will probably be less than those of the past. Due to the current size of Wesco and its parent, Berkshire Hathaway, Wesco's opportunities for growing shareholders' equity are unlikely to be as attractive as in the past. The Board of Directors recently increased Wesco's regular dividend from 351 /2 cents per share to 361 /2 cents per share, payable March 2, 2006, to shareholders of record as of the close of business on February 1, 2006. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidi- aries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC Ñlings, and the websites of Wesco's subsidiaries and parent, Berkshire Hathaway, from Wesco's website: www.wescoÑnancial.com. Charles T.2006