2010

On August 18, 2010 the Wall Street Journal reported that Stanley Druckenmiller would wind down Duquesne Capital Management, returning roughly $12 billion in outside client assets to about 100 limited partners over the following year. The article noted that Druckenmiller would continue to manage his own capital through a family office while stepping away from the obligations of running outside money. The decision ended one of the most celebrated records in hedge fund history - three decades of annualized returns reportedly near 30 percent with no losing calendar year - and was framed by Druckenmiller himself as an act of self-knowledge rather than a strategic retreat. The decision was unusual for an industry in which founders treat assets under management as the primary measure of status. Throughout his career Druckenmiller had told limited partners that he would not accept their capital if he could not give it the same attention he gave his own. The post-Lehman environment - saturated liquidity from central bank interventions, compressed volatility, and markets that no longer rewarded the macro dislocation trades he had built his career around - had begun to feel like a different game. Rather than risk underperformance on someone else's money, he chose to step aside. Returning outside capital let him continue trading his own through the Duquesne Family Office without the obligation to perform in conditions he felt he no longer understood. The episode is now cited in hedge fund literature as a model of stewardship - the rare manager who chose the integrity of his record and his clients over the economics of running a large fund. In an industry where most managers only stop when forced, Druckenmiller's voluntary exit became one of the most cited case studies in knowing when to walk away.

The Skorina Letter's September 2010 profile of Seth Klarman examined the unusual career arc that produced one of the most respected investors of his generation and that did so within a structure that departed significantly from the conventional template of the institutional asset-management firm. The profile noted that Klarman had been influenced early by the value-investing tradition through his family connection to the universe of Boston-based partnerships, and that his decision to found Baupost at the age of twenty-five was grounded in a conviction that the discipline of value investing could be sustained over decades if the structure of the firm was designed to protect it. The letter framed the founding choice as much as a structural decision as an intellectual one, and observed that the structural decision has been the foundation of everything that followed and of the firm's capacity to sustain its discipline across multiple cycles of crisis and recovery. The profile highlighted that Klarman's edge was as much in the design of the firm as in the substance of his investment decisions, and that the two were inseparable in any honest accounting of the firm's long-term record. The letter observed that Baupost's lock-up structure, its private capital base, and its refusal to take in institutional capital on terms that would constrain the firm's patience were all deliberate choices that reflected Klarman's view that the conditions of the partnership were inseparable from the philosophy it practiced and that the firm could not have sustained the philosophy under the structural conditions that governed most of its peers. The Skorina Letter framed this as a form of management quality that is rarely analyzed in conventional frameworks, since the design of the firm is itself a strategic decision and since the design choices that Klarman made at the founding have shaped every subsequent decision in ways that are difficult to see from outside the firm. The piece also examined Klarman's role as a steward of capital across multiple cycles, including the firm's conduct during the 2008 crisis when Baupost was positioned to act as a buyer of last resort for distressed assets and when the structural choices made at the founding allowed the firm to act when others were forced to step aside. The profile argued that this conduct was a direct consequence of the structural choices made at the firm's founding, since the ability to act when others were forced sellers required both the capital and the cultural permission to do so, and since both the capital and the cultural permission were products of choices made decades earlier. The letter closed by noting that Klarman's career was best understood as a long demonstration that the design of the firm is the most important investment decision a manager ever makes, and that the substance of the subsequent decisions is shaped in ways that are difficult to detect but that are foundational to the long-term record.

Community and Caring, Courage and Character Remarks by John C. Bogle, ‘47 Chairman Emeritus of the Board of Trustees Blair Academy Commencement May 20, 2010 It is an extraordinary privilege for me to have the opportunity to speak to the members of Blair Academy’s Class of 2010 at your graduation, and at the commencement of your long journey beyond these halls into college and then out into the real world. I’m especially proud to see your classmate and my grandson Chris St. John receive his diploma, along with Bogle Brothers Scholars Asia Bryant, Collin Stahlkrantz, and Neil Zimmermann. What on earth, you must be asking, can an aging alumnus like me—a proud member of Blair’s great Class of 1947—possibly tell you that would help you appreciate even more your years at my beloved Blair, atop these glorious hills on this bright new day? This morning I’d like to remind you, not only of how much Blair has changed, but, of far more importance, how much endures. Change is the easy part. Just contrast Blair today with the Blair that my late twin brother David and I saw as we began our junior year here all those years ago, driving up the hill to this lovely campus in fall, following my older brother William, Class of 1945. The change is astonishing. Then, Marcial Field was a thicket. Bogle Hall—named in honor of my beloved parents—wasn’t even a gleam in my eye. Memorial Hall—which became Timken Library in 2006—had not yet been built.

In his 2010 baccalaureate address at Princeton, Bezos framed the choice between cleverness and kindness as the central question of a well-lived life. He told graduates that cleverness is a gift, but kindness is a choice, and that gifts are easy while choices can be hard. The speech opened with a story of his grandfather gently telling him, after a childhood incident, that one day he would understand it is harder to be kind than clever. Bezos warned that one can seduce oneself with one's gifts, often to the detriment of one's choices. He closed by predicting that when his listeners were eighty years old, the most compact and meaningful version of their life story would be the series of choices they had made. In the end, he said, we are our choices — a phrase that reframed the baccalaureate as a meditation on agency rather than talent.

At the 2010 Daily Journal annual meeting, I told the audience that the previous two years had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest credit crisis in eighty years. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2010 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the mistakes facing the participants, and the investor who recognises the patterns, and who refuses to participate, has an enormous advantage over the investor who assumes that the new version of the old mistake is different. The 2010 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the history, to recognise the patterns, and to refuse to participate in the new version of the old mistake, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal, and who applies it consistently over a working life, will, in the long run, outperform the investor with the higher IQ who participates on the assumption that the new version is different.

The case frames the Zain deal as the moment Bharti committed to a multi-market operating model after two earlier attempts at MTN failed, and notes that the financing structuring — combining rights issues, vendor financing and debt — set the template for later Indian outbound telecom M&A.

Buffett decomposed Berkshire's intrinsic value into three components: the value of its non-insurance businesses, the value of its insurance operations (including investable float), and the value of its marketable securities. He argued that this decomposition was more informative than book value, which understated the value of businesses whose economic goodwill had grown well above its recorded amount.

On the three-part intrinsic value framework.

The Fifth “Never” A Commencement Address to the Class of 2010 Trinity College Hartford, CT May 23, 2010 There is a wonderful story—which is, I fear, apocryphal—that sets the stage for my remarks this morning to Trinity’s great Class of 2010, your proud college’s 184 th graduation. It is the story of a visit to Harrow School during the early 1960s by Sir Winston Churchill, that lion of the British Empire, returning to the scene of his graduation in 1893. As the story goes, Churchill was well into his eighties—frail, wizened, and bent over— when he returned to Harrow for the opening of school, a formal affair with the students and their teachers in white tie. At the conclusion of the dinner, Churchill was asked if he’d say a few words. He rose, paused, and then spoke. “Never give up. Never. Never. Never, Never. Never.” Then he sat down, to thunderous applause. That is the simple message I deliver to you today as you enter the tough real world that recent generations have given you: Never give up. I’ve especially loved the fifth “never” in that sequence, not because of the number itself, but because that fifth “never” is a wonderful metaphor for the numerous times in the lives of so many of us when, faced with defeat, we have had to draw on our deepest resources to fight back and defend our lives, our careers, our principles, our honor, and our character. Churchill’s entire life was a battle, and his “nevers” surely must total in the scores.

Mr Forename Surname Company Name Address line one Address line two Address line three Address line four Monday 10th January 2011 Dear Fellow Investor, This is the first annual letter to owners of The Fundsmith Equity Fund. Fundsmith opened for business on 1st November 2010, and we are critical of attempts to measure investment performance over short periods of time. Two months is not a short period, it is a ludicrously short period to do so. However, I thought that this letter is a good opportunity to give you a flavour of the reporting which is likely to occur in years to come. From 1st November to 31st December 2010, The Fundsmith Equity Fund rose by 6.14% net of fees. This compares with some common benchmarks as follows: Fundsmith Equity Fund 6.14% MSCI 7.99% MSCI EAFE 5.76% FTSE100 4.40% Long Bond (10 year UK Treasury) -2.57% Benchmarks are useful for measuring performance, provided a long enough time scale is used. Problems arise when fund managers start to use them for portfolio construction. At Fundsmith we do not endeavour to track any index or to minimise our “tracking error” versus any index (even the use of the expression tracking “error” tells you that an active fund manager has the wrong mindset). The Fund underperformed the MSCI and outperformed the MSCI EAFE-the difference being in the performance of US stocks which are included in the former but not the latter. It outperformed the FTSE100 and long bonds.

Samuel McCracken's review of The First Tycoon opens by cataloguing the four things everyone knows about Cornelius Vanderbilt, and finds each of them wrong. He did not found the New York Central Railroad; others founded it, and he made it great. His nickname was not a sardonic joke about a one-man Staten Island ferry but the press's salute to a shipping magnate, commodore then being the highest rank in the United States Navy. The public be damned, the most famous quotation attached to the name, was left to his son William to pronounce, not the Commodore. And the potato-chip origin myth, in which the crusty tycoon sends back fried potatoes as not thin or salty enough, collapses on the fact that the chip reached the Saratoga Springs restaurant ahead of him. The biography behind these corrections, by T. J. Stiles, won the Pulitzer Prize for biography in the spring of 2010.

The New York Times DealBook reported live from the 2010 Ira Sohn Investment Conference, where Klarman delivered one of the most quoted presentations of his public career and one that has continued to be cited in the years since as a reference point for the combination of value discipline and macroeconomic critique that characterized his public voice during the post-crisis period. The presentation combined a defense of value discipline with a sharp critique of the fiscal and monetary trajectory of the United States in the aftermath of the financial crisis, naming specific risks that the consensus had decided to ignore. Klarman warned that the policy response to the crisis, while perhaps necessary in the moment of acute stress, had created longer-term risks that the market was not yet pricing, particularly around inflation and the sustainability of public debt at the levels and trajectories that the policy had produced. The DealBook coverage noted that Klarman's presentation was unusual in its willingness to combine a macroeconomic critique with specific investment recommendations, a posture that most value investors avoid on principle and that Klarman himself had historically been reluctant to adopt in public forums. He argued that the conditions of the moment made it impossible to separate the two, since the policy environment was distorting the prices of nearly every asset class at once and since any analysis that ignored that distortion would be incomplete in a way that mattered for actual investment decisions. The presentation named particular sectors that he believed were mispriced, and cautioned that the apparent recovery in equity markets was masking a deterioration in the underlying credit structure of the broader financial system and that the recovery would be tested when the policy support was eventually withdrawn or when the underlying credit deterioration could no longer be masked by the suppression of rates. The piece observed that the audience's reception was mixed, with several attendees reportedly skeptical of the macroeconomic pessimism that framed the presentation and with the broader market continuing to rally in the months that followed in a way that seemed, at the time, to contradict the cautionary tone. In hindsight, the DealBook coverage noted that several of Klarman's specific concerns, including the risk of sovereign debt stress and the distortions introduced by quantitative easing, became central themes in the years that followed and were vindicated by events that the consensus had not anticipated at the moment of the presentation. The presentation became a reference point for value investors who saw in it a template for combining patient discipline with a willingness to articulate uncomfortable macroeconomic truths when the evidence demanded it and when the broader consensus had decided to look past the risks that the evidence was surfacing.

On February 9, 1859, Henry J. Raymond, editor of the New York Times, published the editorial that launched a phrase. Raymond, no friend of Vanderbilt, assailed him for accepting a large monthly payment from Pacific Mail in exchange for staying out of the California sea lanes, comparing him to the old German barons who swooped from their Rhine castles to wring tribute from every passing merchant. Though Raymond never used the exact words, it was the first known use of the robber baron metaphor in American journalism. The strange part, as Stiles observes, is what Raymond meant: Vanderbilt was a robber baron because he preyed upon monopolists. Pacific Mail held total control of the California sea lanes and bought Vanderbilt off to preserve its monopoly, and Raymond attacked him for pursuing competition for its own sake, for crowding out what the editor considered legitimate enterprises. The modern meaning, titanic monopolists crushing rivals and corrupting government, is nearly the opposite.

Across sixty-six years, the review observes, Vanderbilt committed himself to a single business: transportation. His water empire took in New York Harbor, the Hudson, Long Island Sound, the route to San Francisco through Central America, and the North Atlantic; he straddled sea and land once he joined Boston and New York with linked steamboat and rail services, and not until around seventy did he give up the water entirely, selling his fleet to fund his new empire on rails. In linking New York with Chicago he laid almost no track of his own, yet few could match his eye for track other men had laid, which is why the reviewer crowns him the Great Consolidator. The country's existing rail system of six giant corporations is, in the reviewer's judgment, the direct descendant of the Commodore's consolidating strategy, nowhere more visible than in his 1867 purchase of the New York Central. Amtrak still runs passengers from New York to Chicago largely along the route he assembled.

The main positive contributors to that performance were: 1. Del Monte Foods 2. Becton Dickinson 3. Domino’s Pizza Inc 4. Nestle 5. Stryker Corp The main contributor was Del Monte Foods. Del Monte could almost be a case study in how investment opportunities arise. We were attracted to Del Monte by its main product- pet food. Pet food is typical of the sort of product we seek to invest in. It is a small ticket, consumer, non-durable. As a small ticket purchase, no credit is required to buy it. The consumer has no opportunity to bargain on price - the price the supermarket or pet store displays is the price you pay. Consumers are typically brand loyal, and once it has been consumed there must be a replenishment purchase-there is no opportunity to defer this by prolonging the life or ownership of the product as there is with a consumer durable, like a car. Moreover, research clearly shows that if times are hard, consumers will reduce their spending on food for themselves or their children rather than cut back on their pets’ food. However, the fact that pet food is Del Monte’s main product line seemed to be lost on most investors, many of whom were assessing it on the basis of their folk memory of its main historic product range in canned fruit and veg. This is what produced the opportunity to buy Del Monte stock on a free cash flow yield which was generous for its likely financial performance.

The Princeton speech gave the founding narrative of Amazon in Bezos's own words. He recounted that sixteen years earlier, in 1994, he had come across the fact that web usage was growing at 2,300 percent per year, a rate he had never seen or heard of, and that the idea of building an online bookstore with millions of titles — something that simply could not exist in the physical world — excited him enormously. He had just turned thirty, was married for a year, and was working at a financial firm in New York City with a brilliant boss he admired. He told his wife MacKenzie he wanted to quit and try something that probably would not work. He framed the decision through what would become known as his regret minimization framework: he did not think he would regret trying and failing, but suspected he would always be haunted by a decision not to try at all.

He fought in India, in the Sudan, and in the Boer War, where he was captured and then escaped. He was ousted as Lord of the Admiralty after the disastrous Gallipoli campaign in World War I. In and out of Parliamentary office for decades, he became Prime Minister in 1940. His determination, spirit, and never-say-die leadership rallied Britain in World War II, finally leading the Allies to victory in 1945. Rejected by the voters later that year, he never gave up, returning as  Churchill’s biographers cite a 1941 speech at Harrow entitled “Never Give In.” Whether he returned 20 years later, as the legend goes, has never been confirmed. But it’s a wonderful story anyway.

Vanderbilt's career began in an economy still ruled by patricians. In 1798 the New York legislature handed Chancellor Robert R. Livingston and Robert Fulton a monopoly on steam navigation, and Livingston passed it down as a hereditary right, the logic of what historians call the culture of deference, in which the state turned to its leading families to direct orderly economic development. New York's 1777 constitution had entrenched the hierarchy with three tiers of citizenship and escalating property requirements for voting. Thomas Gibbons attacked the monopoly out of a personal vendetta against Aaron Ogden, punishing him commercially, one aristocratic observer marveling at such malice in an enlightened age, while carrying the case to the Supreme Court. Chief Justice Marshall's 1824 ruling that states could not erect barriers to interstate commerce ended the monopoly; Ogden went to debtor's prison, Gibbons died in 1826, and Vanderbilt emerged as a proprietor in his own right. Competition itself was a new thing on the American scene, and the old elite read it as pure destruction.

Armstrong-Hipkins Hall didn’t exist, nor did Mason and Freeman, nor Annie (Ann Siegel) Hall. And our small gymnasium of all those years ago would remain pretty much the same until its recent rebuilding as our splendid Hardwick Hall. Then, we students were all boys, for coeducation would not return to Blair until 1971.

The Wall Street Journal's reporting made clear that the closure was not triggered by redemptions or by a single losing trade. Duquesne was managing roughly $12 billion at the time, and the wind-down was structured to return capital to clients smoothly over the following year rather than via forced liquidations. Druckenmiller's stated reason - that he felt he was 'losing a step' and could no longer give the obsessive attention his strategy required - was widely treated as a model of self-awareness in an industry that rarely admits diminishing intensity. The structural problem Druckenmiller described was that the post-2008 liquidity regime had compressed the very volatility and dislocations on which a concentrated macro trader thrives. With the Federal Reserve anchoring short rates at the zero bound and flooding the banking system with reserves, market pricing had become a function of central bank signaling more than of fundamental macro forces. For an investor whose edge was reading the global macro tape and sizing aggressively when conviction was high, the new regime meant either taking smaller positions or accepting risk-reward profiles that did not justify the same leverage. Choosing between reduced position sizes and lower conviction was, in Druckenmiller's own telling, a choice between underperforming his own historical bar and playing a game he no longer recognized. The closure letter to limited partners emphasized the obligation he felt to protect their capital rather than collect management fees on it. The Duquesne Family Office would go on to manage his personal wealth, free of quarterly reporting obligations, and the 2010 closure remains the most-cited case of an elite manager voluntarily stepping down at the top of his game.

The decision to extend the outsourcing model into Africa rather than staff up locally is treated as the empirical test of whether the Indian telco playbook was portable; the subsequent unit economics broadly confirmed the model with market-specific modifications.

The Wall Street Journal coverage framed the 2010 closure as a generational turning point for the macro hedge fund industry. Druckenmiller had come of age in the 1980s and 1990s when currency pegs, emerging market crises, and central bank policy errors produced the kind of large, persistent macro dislocations that allowed a concentrated trader to size positions to the limits of fund leverage. By 2010 the policy regime had inverted - central banks were actively suppressing the volatility that had once been his raw material. Druckenmiller's response was to recognize that the edge had narrowed rather than to deny it. He had told investors over the years that the single most important trait for a macro trader was humility about when one's own edge was deteriorating. Closing the fund was an admission that the post-Lehman regime - with zero rates, quantitative easing, and forward guidance as the dominant price-discovery mechanism - had structurally altered the opportunity set for the kind of trading at which he excelled. It was an act of risk management at the meta level - refusing to play a game he could no longer model accurately. The legacy of the decision was less the wind-down itself than the standard it set. A generation of younger macro managers now cite Druckenmiller's 2010 closure as the model for how to step aside with integrity: ahead of a slow erosion in performance, with capital returned at full NAV, and with a clear-eyed statement that the environment rather than the manager had changed. For an industry in which chronic underperformance is often extended by management-fee economics, the closure became a benchmark for what fiduciary stewardship actually looks like.

Bezos described at Princeton how MacKenzie, also a Princeton graduate, told him to go for the online bookstore idea, and how he had been a garage inventor since childhood — building an automatic gate closer out of cement-filled tires, a solar cooker from an umbrella and tinfoil, baking-pan alarms to entrap his siblings. He had always wanted to be an inventor, and she wanted him to follow his passion. The framing positioned Amazon as an inventor's company from the very beginning, with the personal narrative tying back to his grandfather's ranch-style resourcefulness. The speech positioned marriage, partnership, and a willingness to move across the country as integral to the founding story. Bezos made clear that the bet on Amazon was a bet on passion and on a less safe path, taken with his wife's full support, and that he remained proud of that choice a decade and a half later.

Wherever Vanderbilt operated, he was feared as the most effective competitor alive, one who either destroyed his enemies or extracted a ransom for leaving a market. A businessman of the era, weighing whether to face him, confessed to a partner that he would rather have Vanderbilt with him than against him. The political culture split on what to make of such men. Conservative Whigs condemned bare-knuckle competition, wanting rapid development guided and assisted by government, and Raymond wrote his 1859 attack as an old Whig, praising Pacific Mail as a virtuous, privately owned instrument of a federal plan for communications with California, subsidized for carrying the mail. Jacksonian Democrats took the opposite view: aggressive self-interest in the marketplace was a matter of individual liberty, and government involvement in the economy merely granted special privileges to favored men, manufacturing the artificial aristocracy that was democracy's antithesis. In the era of universal white manhood suffrage, competitive individualism carried the argument, and Vanderbilt was its most successful practitioner.

Prime Minister in 1951, and writing the six-volume The Second World War, and the four volume History of the English-Speaking Peoples. In 1953, he won the Nobel Prize in Literature. Surely Winston Churchill was the paradigm of his words at Harrow. This great man never gave up. American history, too, is studded with heroes who spent their lives overcoming defeat and adversity. Think about my favorite Founding Father, Alexander Hamilton, born in Nevis in the West Indies and described by John Adams as “the bastard brat of a Scottish peddler.” But he rose to become George Washington’s right-hand man; a hero in our final victory of the Revolutionary War at Yorktown; and our first Secretary of the Treasury. Alas for our country, Hamilton died at the age of 49, slain by Aaron Burr in a duel. But while he did not survive to fight again, most of his remarkable ideas have survived. The man may be gone, but his ideas have endured for the ages. Hartford’s local hero—and justly so!—Mark Twain also faced frequent reversals. But he too never gave up. His younger brother was killed in an explosion on Twain’s steamboat, and the early deaths of his wife and two of his three daughters left him devastated. He squandered the earnings from his books on inventions that failed, and his ventures in publishing also came to naught, even though his publication of the memoirs of General Ulysses S. Grant (talk about a man who never gave up!) was a critical and commercial success.

On one occasion this misunderstanding was compounded when Bloomberg managed to publish an article from the Galveston County Daily News about a strike at Fresh Del Monte Produce Inc - an entirely different company which sells fresh produce - against Del Monte Foods. Such events can create opportunities to buy great companies at good prices. Eighteen days after the Fund opened and we purchased our initial holding in Del Monte it was bid for by private equity firm KKR at a significant premium to the price we had paid. Whilst it would be churlish to suggest that we do not like receiving a premium for our investments in cash, such events are not without their downside as we have to find an equivalent investment for our cash. The fact is we really want to own our stakes in the companies in our portfolio and benefit from the good cash returns on capital which they generate. We are not simply hoping to on-sell the investment at a higher price. This changes perspectives on events such as takeovers. Just as we counsel you not to become overly enthusiastic about share price rises, even those which relate to cash bids for our holdings at a premium which represents a good return on our investment, we hope that you will understand when we are explaining that price falls within the portfolio will often represent an opportunity for investment on even more rewarding ratings rather than an opportunity for soul searching and recriminations. Often but not always.

Yet much has remained the same. Clinton, Insley, the Arch and Ivy, West and Locke remain the core of our campus, now in the process of being graced with a lovely new pedestrian walkway and plaza. While surrounded by all those new buildings, this core, it seems to me, remains the paradigm for the character of our school: iconic, traditional, strong as that granite, stable, lofty, seemingly an eternal monument to the foresight of our founder John I. Blair and his early associates 162 years ago. But the most important element that has remained unchanged is the character of our school. Yes, we’ve had our share of ups and downs since I first arrived here to study 65 years ago. But the strong and durable leadership of yore has been reaffirmed—and then some—by our Headmaster Chandler Hardwick (and of course Monie), soon to begin their 22nd year here, the longest serving tenure in Blair history, save only the 29-year headmastership of Dr. John Sharpe, from 1898 to 1927. We also continue with the same high quality of teachers, dedicated, as I have so often said, to helping you young men and women learn more than you might otherwise would have learned, accomplish more than you might otherwise have accomplished, and develop your characters more fully than you might otherwise have developed them. Your remarkably successful college admissions record suggests that Blair’s Class of 2010 has attained a level of scholarship and service that compares favorably with the very best of the past.

In no case do we believe that the fall in the price alters our view of the investment (other than the obvious point that we wish we had made it at the lower price) nor do we believe it reflects an adverse change in the intrinsic worth of the business. The historic dividend yield on the Fund at year end was 2.47%. This dividend was covered over 2.5 times by earnings. Only one stock in the fund does not currently pay a dividend. This is significant: dividends have historically provided a significant portion of the total return on equities. The current yield on the Fund may not fully reflect its dividend paying capabilities as some of the companies also utilise share buybacks. These can contribute to shareholder value creation when they are used correctly (to purchase shares which are under-valued when no better investment opportunity presents itself). At the end of 2010 we held a portfolio of 22 stocks including Del Monte. The average company in our portfolio was founded in 1883. We are investing in businesses which have shown great resilience over a long period of time-in most cases surviving two world wars and the Great Depression. The trailing free cash flow (“FCF”) yield was about 7%. This free cash flow was either distributed as dividends, used for share buybacks, or invested by the companies in order to generate further returns.

When the gold rush began, Vanderbilt abruptly abandoned the regional transportation market around New York and entered ocean-going steamships, even though Washington subsidized his rivals, Pacific Mail and the US Mail Steamship Company, its partner. He built steamships for both the Atlantic and the Pacific, connected by his transit route across Nicaragua, north of the established Panama crossing, and inaugurated the line in 1851 with lower fares and a faster passage, swiftly earning a fortune. When war closed the Nicaragua route in 1856, the subsidized incumbents paid him a large monthly fee to keep him from competing by way of Panama. The California lines, Stiles argues, gave Americans their first glimpse of big business: routes stretching thousands of miles, with stations in distant countries, whose fights rippled across hundreds of thousands of travelers, and whose demands fed industries like the shipyard and steam-engine works Vanderbilt bought. Of the great steamship organizers of the 1850s, George Law, William H. Aspinwall, and Marshall O. Roberts, only Vanderbilt is remembered today.

It is that enduring character that drives our Academy’s continuity. So as you graduate and move on, please never forget that you will remain part of Blair’s strong legacy for the rest of your life. In return, I ask each one of you to assume the responsibilities, now citing my remarks at the start of our successful “Ever, Always” Capital Campaign, “to preserve, to protect, and to defend this fount of liberal education, this island of opportunity, this community of teaching and learning.”

But despite these personal and professional setbacks, Mark Twain kept his sense of humor, kept on writing, and, yes, never gave up. Like those giants of history, even those of us with far more humble accomplishments have confronted adversity and defeat and never gave up. What accounts for that spirit? I think that in my case it began with my beloved mother reading to her little boys—over and over again—The Little Engine that Could . . . “I think I can (get over that mountain); I think I can; I think I can.” And then, “I knew I could; I knew I could; I knew I could.” That spirit gave me strength during my early academic struggles—perhaps some of you can relate to them—at Blair Academy (a 40 on my first Algebra exam) and then at Princeton University, when an early D in Economics threatened my scholarship and thus my continuing there. But I never gave up, earned ever better grades, and graduated with distinction. That same spirit bolstered my ability to face a lifetime of health challenges. When doctors told this then-31-year-old man, suffering from congenital heart failure, that he was unlikely to reach his 40 th birthday, there was little choice but to fight on.or

eight heart attacks, I fought my way through the four decades that followed. (Take that, you predictors of my early demise!) But by then, half of my heart had stopped pumping. The only hope was a heart transplant. After 128 days waiting in the hospital, suffused with life-sustaining intravenous drugs, the strong spirit and the frail body never gave up, and the new heart arrived on February 21, 1996. Such a second chance in life is something of a miracle, and though the last few years have presented their own health challenges. (After all, I’m now almost as old as Churchill was when he delivered that powerful peroration at Harrow.) But my reaction is simple: “If you’ve been given fourteen additional years of life, it doesn’t seem to be a good idea to go around bitching.” (Forgive me, please for my crude choice of words, but “complaining” simply doesn’t do the job!) During all those decades of health challenges, I faced major challenges in my career. It’s no fun to be fired—some of you, I’m sorry to say, will also have to learn that—but that’s exactly what happened to me in January 1974, eight years after I made a foolish—even stupid—decision to merge the firm I then headed. Corporate power politics, alas, trumped common sense; the merger blew up, and I found myself out of work. But—as you may now suspect—I wasn’t the giving-up type. By September 1974, I’d started a new firm, named it Vanguard, and went back to work.

In 1863, amid the Civil War, Vanderbilt began selling his steamship interests to buy railroad stock, and younger brokers on Wall Street mocked him, doubting the aging Commodore grasped the nation's most dynamic industry. In truth he had known railroads almost since American railroading began: his steamboats had connected with New England's earliest railways, he had seized the Stonington's presidency in 1847, and through the 1850s he had helped save the endangered Erie Railway and the Harlem by lending money and restructuring their debt. He became the era's greatest railroad tycoon almost by accident: at sixty-nine he wished to show he could turn a nearly bankrupt railroad into a thriving company. The fragmented web of local lines pulled him onward. He took the Hudson River Railroad in 1864, seized the New York Central in January 1867 by stopping trains over the Hudson River at Albany and briefly severing New York City from the country, and in 1869 gained the Lake Shore and Michigan Southern through a short-selling campaign that bankrupted his rival LeGrand Lockwood.

As it is everywhere, the concept of community is changing at Blair. In your headmaster’s words, this campus is no longer the remote island “isolated from the non- boarding school world . . . and the diversions of urban/suburban culture” that it was when I sat where you sit today. No, today’s constant communications and creative connectivity have shrunk our world to a fraction of its previous size. But building a community— being a member of a community—is what engages you students and your teachers in all aspects of your daily lives. However much it may change, the concept of community must remain Blair’s hallmark. What is required of you and your fellow students—and, truth told, of me and my fellow alumni and alumnae—to maintain and indeed build on these attributes of this amazing, enduring academy, this special institution? In my 2008 book, Enough. True Measures of Money, Business, and Life, I said that caring must be the soul of any institution that aspires to greatness. I paraphrase the idea here: Blair Academy must be the object of intense human care and cultivation. Even when she errs and stumbles, she must be cared for, and the burden must be borne by all who come here, all who teach here, all who study here, all who learn here, all who have been served here, all who lead Blair, all who govern her. Every responsible person must care, and care deeply, about every institution that touches your life. So your job, as well as mine, begins with the simple exhortation, care.

As our portfolio had an average return on operating assets of 50% this reinvestment of cash flows should produce compounding of value for us as shareholders. This FCF yield compares with a FCF yield on the S&P 500 of a bit less than 7%. The median (250thranked) FCF yield in the S&P is 6.6%. What we can say with a high degree of certainty is that our portfolio has a FCF yield higher than the average for the market. Yet it is inconceivable in our view that it is not of higher than average quality in terms of longevity, resilience, predictability, profit margins, return on operating capital and the conversion of profits into cash. Put simply this means that we own shares in businesses which are higher quality than the market on a valuation lower than the average for the market. Whilst that is not a total solution to successful investing, it strikes us as at least a good start. We regard an equity holding as a claim on a share of the cash flow produced by a business. In the Fund we seek to own companies which produce high cash returns on capital and distribute part of those returns as dividends and re-invest the remainder at similar rates of return. And we want to own those companies shares at prices which at best under-value their returns and at worst value them fairly.

Care! The job of caring is by no means easy, nor will it ever be perfectly completed, certainly not in my lifetime, nor, with all due respect, in yours. For while you still have much work to do as you mature and grow to your full potential, Blair has provided you with a solid foundation for your future education, your career, and your life, just as it did for me. But fulfilling your potential is rarely an easy task.communities,

We do not regard equity investment as a sophisticated game of pass the parcel in which we buy shares in companies that we don’t understand, which may be poorly performing businesses and/or which are over-valued, hoping to sell them to a greater fool when they have become even more expensive as a result of some fad or share price ramp. Such games are best left to video consoles unless your hobby is losing money whilst investing, which I rather suspect it is for some people. I aim to restrict myself to one rant per letter about a subject relevant to investment. Frankly given the behaviour of much of the wealth/asset management industry, I regard this as a model of self restraint given the target rich environment.

His one failed campaign was the 1868 attempt to corner the stock of the Erie Railway, launched to punish Daniel Drew for betraying him on the stock market. As Vanderbilt bought, Drew, the Erie's treasurer allied with Jay Gould and James Fisk, sold short, and the board flooded Wall Street with fresh certificates of dubious legality. The notoriously corrupt judge George Barnard issued arrest warrants; the Erie directors packed up the corporate files and funds and fled to New Jersey; Gould visited Albany with a suitcase of greenbacks, and the suddenly enriched legislators legalized the new shares. Barnard kept the warrants alive, forcing a compromise in which the company restored Vanderbilt's losses and he asked the judge to let the directors return. Stiles draws out the nuance: for all the graft surrounding Vanderbilt's career, no evidence convincingly shows that he corrupted government officials, since corruption also flowed as extortion by officeholders. The Erie War personalized the rising institutional economy, making dehumanization human.

I tell people that I took on my new job just the way I left my old one . . . fired with enthusiasm. (Think about that one!) Most of the ideas and values that I invested in Vanguard were themselves greeted with skepticism, opprobrium, and even antagonism. But the “never give up” attitude carried the day. Our unique mutual structure, in which we operate our funds at cost, is now saving our investor/owners billions of dollars each year. We created the world’s first index mutual fund, (simply holding all of the stocks in the Standard & Poor’s 500 Stock Index); pioneered the marketing of funds directly to investors (eliminating those hefty 8 percent sales commissions); and designed revolutionary new investment strategies for bond fund management and for tax- efficient investing. Like all radical new ideas, these concepts endured the usual responses: First, “It’ll never work.” Second, “Yes, it works, but it’s all luck, and it won’t meet the test of time.” And third, “Of course it works; I always knew it would.” But together, these ideas have, for better or worse, enabled our firm to become the largest mutual fund manager in the world.most

This year’s rant is a warning about the misunderstanding and misuse of Exchange Traded Funds (“ETFs”). I think this is relevant as The Fundsmith Equity Fund launch was somewhat against the tide of events as we launched an active equity fund at the end of a decade in which a) equities have performed badly; and b) the average active fund manager has again underperformed the index and so made a bad performance by the asset class worse. Faced with this failure of active management, it is hardly surprising that investors have turned their backs on active management and headed for lower cost, passive alternatives. As a result, the rise of ETFs has been a major feature of the investment landscape in recent years. By the third quarter of 2010, there were 2,379 ETFs with 5,204 listings on 45 exchanges managing $1,181.3bn of assets. So what’s the problem? I suspect that the average investor regards all ETFs as just another form of index fund, and indeed many of them are. But many aren’t and therein lies the potential for misunderstanding. Or worse. Some ETFs do indeed replicate the performance of an index by purchasing a weighted package of all or most of its constituent securities. But many so-called synthetic ETFs do not do so and instead use so-called swap agreements with counterparties who agree to provide a monetary return which matches the underlying asset class or the index the ETF is seeking to track.

As the newspapers' Railroad King, Vanderbilt took a series of dramatic steps that reshaped the industry, consolidating smaller lines into some of the first giant corporations in United States history, companies capitalized at levels that dwarfed entire industries of the time. With William Henry, his son, serving as his operational chief, he reorganized the companies and brought professional managers into them, introducing new efficiency into the nation's transportation system by lowering costs and building key new infrastructure. Even through the depression that set in after the Panic of 1873, the New York Central and Hudson River Railroad kept paying investors steady, healthy dividends. After his death in 1877 the Railroad Gazette observed that his early career as a railroad manager had been distinguished by a series of bold, startlingly revolutionary measures whose effect reached far beyond the lines he dealt with directly, and pronounced the Vanderbilt era the first great era of consolidations.

ordinary souls among us, favored by extraordinary circumstances and powerful determination, can help to build a better world. But only if we refuse to give up. What does all this mean to you men and women of Trinity College Class of 2010? First of all, I have little doubt that just about every one of you have already faced defeat during your young lives and haven’t given up, storing up character for the years ahead. In the world you are about to enter, beyond these cloistered walls of The Long Walk, the challenges will likely be far larger. Our economy has yet to return to its previous strength; unemployment remains at a record high for the modern era, and finding jobs is tough (you doubtless know that!); the underpinning of our global financial system is fragile, encumbered by grotesquely excessive debt. Our nation’s political process is deeply flawed, with lobbyists paying the piper and too often calling the tune. In our financial markets, the folly of short-term speculation has gained ascendance over the wisdom of long-term investment. (Why can’t we heed Mark Twain’s warning: “There are two times when you shouldn’t speculate. When you can afford to, and when you can’t.”?) So I continue to fight for financial reform, to channel the rewards of investing to those Main Street shareholders who put up their capital, rather than those Wall Street money changers who, more often than not, greedily gobble up enormous rewards, by fair means or, as is now clear, foul.

our companies, our professions, even our politics, in the years ahead. Hear the words of my favorite columnist, David Brooks of The New York Times: Highly educated young people are tutored, taught, and monitored in all aspects of their lives, except the most important, which is character-building. But without character and courage, nothing else lasts. Character and Courage. I used David Brooks’ words in Enough., and added these words of my own: “If character is not taught, (and perhaps it cannot be taught) how can it possibly be learned? The affluent world in which so many young citizens exist today doesn’t easily create the ability to build character. Often character requires failure; it requires adversity; it requires contemplation; it requires determination and steadfastness; it requires introspection—that rarest of human traits—it requires finding one’s own space as an individual. And it surely requires not only courage, but honor.” In the excitement of this grand day, these ramblings of an aging alumnus will soon be forgotten. So please try to remember—and live up to—those “four Cs” I’ve talked about this morning—community and caring, character and courage—the essential elements that a Blair education seeks to foster. To help you remember these four Cs, I have a small gift for each of you, a copy of a new edition of Enough., hot off the presses, with a foreword by President William Jefferson Clinton.

Anyone who has studied the events of the Credit Crisis should be able to spot a potential problem here: what if the counterparty supplying the swaps defaults? This risk may once have been considered theoretical, but after the collapse of Lehman and the need to rescue AIG in order to prevent the contagion from a default it surely no longer is. True the ETF should be holding collateral against such a failure, but collateral is an imperfect science even where it is held which is not in all cases. Moreover, in some cases the sole counterparty Moreover, synthetic ETFs are often used at access markets which are not directly accessible to retail investors such as the Chinese A-share market or where liquidity in the underlying investments is poor such as equities in some emerging markets. The opportunity for the performance of the ETF to diverge from the performance of the underlying assets and therefore from the investors’ expectations in these cases seems obvious. The idea that a counterparty will provide you with a contract which matches the returns from underlying illiquid assets which you cannot directly own should give pause for thought-not least about how the counterparty will fulfil those obligations, for example in the case of extreme market movement and a liquidity crisis-a not unlikely combination. Of course not all ETFs are used to simply match the performance of an index.

I’ve signed each one, “from one Blair graduate to another,” and we’ll present it to you shortly. Please enjoy the book. There is one more “C” on my list—Celebrate! In a few moments, each of you will receive your diploma. Congratulations for earning it. Let your well-deserved joy and pride in your accomplishments and your lives at Blair Academy be remembered, and celebrated, for as long as you live. Echoing that powerful senior class video that we saw yesterday, this lovely day is indeed “a brand new day. You’re going to be OK.” I promise! Good luck and Godspeed.

So I continue the battle to build a better financial system, even in these late years of my long life. Your careers, your challenges, and your battles will inevitably be different from those I’ve faced, but I know you’ll measure up. Your generation is our nation’s hope for years to come. There is much work to be done, and you have the great opportunity to fix what has been so badly broken in our society. Whatever path you pursue, you have a duty to help build a better world. But no matter what you decide—and wherever time and tide may take you—be sure to be a good citizen, and raise good citizens to follow in your footsteps. And when reverses come, as they surely will, Never give up. Never. Never. Never. Never. Never. Don’t forget that fifth never. Someday you may need it. Good luck, Class of 2010, and may God bless you all.

There are leveraged ETFs which multiply index performance, inverse ETFs which replicate a short position in an index and of course, leveraged inverse ETFs. The issue with these ETFs is that their returns are compounded daily.tables;

Day 1 Day 2 Day 3 Day 4 Index 100 125 90 103 Daily Change 25% -28% 14% Cumulative Change 25% -10% 3% Leveraged ETF (+2X) 100 150 66 85 Daily Change 50% -56% 29% Cumulative Change 50% -34% -15% The first table shows the movement in an index in a highly volatile period in which it rises sharply then falls to finish just 3% up over the period. The second table shows the performance of a 2x leveraged ETF over the same period. With daily compounding the leveraged ETF produces a cumulative loss of 15% of value over the period versus a 3% rise in the index. How about an inverse ETF? Index % Movement Short Position ETF (Short) Day 1 100 100 100 Day 2 80 -20.0% 120 120 Day 3 60 -25.0% 140 150 Day 4 55 -8.3% 145 162.5 Day 5 100 81.8% 100 29.5 In a week where the index was volatile on the downside but got back to par by the end of the week an inverse ETF with daily compounding would turn in a 70.5% loss. You can imagine what a leveraged inverse ETF would do! I would bet that a large proportion of ETF investors do not realise that leveraged and inverse ETFs can produce these apparently perverse results. The moral of this is that these sort of ETFs are really day trading tools. If they are held for more than one day, they will begin to diverge from the performance of the underlying index or asset class. However, it would not be surprising if in many cases they were being used inappropriately as if they are index funds.

Finally, returning to our own active fund, we look forward to the year ahead. This is not because we have any faith in a sustained recovery in major economies and/or that we regard equities in general as cheap or equity markets as a whole as good value or well placed to track improvements in corporate profitability which in any event may not be forthcoming. It is firstly because we believe our Fund contains a portfolio of shareholdings in great businesses which we have purchased at reasonable prices or better and which we intend to hold onto in order for them to deliver the benefits of such investments. Secondly, it is because we enjoy running The Fundsmith Equity Fund. Robson Walton, the Chairman of Wal-Mart and son of its founder Sam Walton said, “My dad did not set out to make Walmart the world’s largest retailer. His goal was simply to make Walmart better every day, and he thought constantly about how to do just that.” Please be assured we are doing the same with Fundsmith. Yours sincerely, Terry Smith CEO Fundsmith LLP Disclaimer: Fundsmith does not offer investment advice or make any recommendations regarding the suitability of its product and no information contained within this document should be construed as advice. Should you feel you need advice please contact a financial adviser. Past performance is not necessarily a guide to future performance.

Decision — Built the Alphabet/US mega-cap book alongside Asia. Context: PKU 2024 keynote describes current positioning. Outcome (known): US sleeve visible in 13F filings (~$3.2B).

Decision — Held Alphabet, Philip Morris, Mastercard, Richemont concentration book. Context: Filing-level record via EDGAR CIK 860643. Outcome (known): Q2 2026: $8.93B across 86 holdings.