Investment Disciplines Business Quality Durability/Competitive Advantage We avoid businesses we don’t understand and who don’t possess durable competitive advantages. We try to develop a deep understanding of underlying business and industry fundamentals and invest capital in companies with predictable and estimable long-term business success and profitability. Capital Structure AND Profitability Balance sheet strength is important. We invest in well-capitalized businesses with manageable leverage that either earn, or are expected to earn, free cash returns in excess of our conservative estimates of firm cost of capital. We are confident that our businesses are sustainably more profitable than both industry peers and also the aggregate of publicly traded companies in general. Accounting Integrity Our process involves a rigorous assessment of accounting integrity. We make ongoing adjustments in the areas of accounting for defined benefit and unfunded healthcare obligations, the cost of and dilution involved with stock options and executive compensation, and the legitimacy of asset write-offs and write-downs. We focus on areas where companies aggressively overstate short-term profitability. Profitability must be measured as free cash relative to the capital in a business. Investment radar must be heightened to situations where costs are buried via acquisitions, where normal expenses are over-capitalized, where companies improperly recognize revenue, where exposure to changes in interest rates isn’t made clear, where related parties are too favorably treated and when accounting standards are changed or are aggressively employed. In the end, if we don’t understand the accounting, we won’t invest. Management We strive to avoid investing in companies where management lacks integrity. We love companies run by honest managers, who not only work to add value for shareholders but also have a good understanding of fair business value and free cash return on capital. Often, bad accounting goes with bad management. We assess whether executive compensation is reasonable and in-line with business size and profitability. Top management of many of our invested companies are often founders or are individuals who have made large direct personal investments in their companies. Risk Management Price Matters Our approach employs a dual margin of safety – that of business quality and that of price. We keep business quality high and we are disciplined about the price we are willing to pay for a business. Low Risk Drives High Expected Returns We seek to defy conventional wisdom which holds that high returns can only come by accepting high levels of risk. Our core investment DNA centers on finding situations where risk levels and prices are so low that our expected upside gains dwarf downside risk. We define risk as a permanent loss of capital, not as some measure of short-term volatility or volatility around some benchmark or mean. Risk comes in many colors and we spend great effort trying to define and manage it. Imperative of No A great luxury of hewing to a process that defines and manages risk is our ability so simply say no and to pass on an investment. We avoid businesses we don’t understand and who don’t possess durable competitive advantages. We don’t have to invest in industries we don’t understand or where valuations don’t make sense. We don’t have to own companies simply because their shares are included in an arbitrary index of stocks. The imperative of no doesn’t go underappreciated at Semper Augustus. Turnover Our average holding period is five years, and we have held many of our investments for much longer. Our activity level typically rises during periods of high volatility. As an example, our turnover in 2008 was much higher than in more normal years. Risk is a Permanent Loss of Capital We don’t expect to outperform during periods when aggregate share prices are rapidly advancing. We do, however, believe our dual margin of safety approach and our exhaustive risk management process protects us during periods of broad market decline. Volatility is our friend – it allows us to build long-term positions at favorable prices.