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February 15, 2014





RE: 2013 YEAR-END REVIEW


The stock market had one of the strongest years in its history in 2013 continuing its
strong performance since the equity markets hit bottom in March 2009.

A breakout of the performance for the past two years of the S&P 500 and Dow Jones
Industrial Average, both with dividends reinvested, is given below

Stock Market Index 2013 Performance 2012 Performance

S&P 500 32.4% 16.0%
Dow Jones Industrial Average 29.6 10.1

Performance of Key Holdings

Below is the breakout of the performance of our largest holdings in 2013, which followed
a strong performance in 2012.

% Change % Change
Company for 2013 Company in 2012

Mohawk 64.6% Mohawk 51.2%
AbbVie Inc. 50.4 Lowes Companies 40.0
TJX Companies 50.1 Thor Industries 36.5
Thor Industries 47.6 TJX Companies 31.1
Bed Bath & Beyond 43.6 Bank of New York 29.1
Lowes Companies 39.5 Martin Marietta 25.0
UnitedHealth Group 38.8 Wells Fargo & Co. 24.0
Bank of New York Co. 36.0 US Bancorp 18.1
Wells Fargo & Co. 32.8 Berkshire Hathaway 17.6
Berkshire Hathaway B 32.2 Abbot Laboratories 16.5
Progressive Corp. 29.2 Brown & Brown 12.5
US Bancorp 26.5 Progressive 8.2
Mercury General 25.3 UnitedHealth Group 7.0
Abbott Laboratories 24.7 Pepsico, Inc. 3.1
Brown & Brown 23.3 Lab Corp 0.8
Pepsico, Inc. 21.2 Washington Post -3.1
Martin Marietta Materials 6.0 Bed, Bath & Beyond -3.6
Lab Corp. 5.5 Mercury General -13.0
World Fuel Services 4.8


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Our 2013 year-end review is longer than usual because we felt it was important to
discuss Berkshire Hathaway at length when Warren E. Buffett is no longer leading the company
followed by our thoughts on several topics raised by our clients and we close by discussing our
portfolio of holdings. We feel it is important for our clients to better understand our
thinking and we try to include the information that we would want if our roles were
reversed. Our letter consists of several parts.

First, while we have shared our views on Berkshire Hathaway many times over the
years, we have never gone into detail about Berkshire Hathaways future when Warren E.
Buffett is no longer leading the company. Given that Berkshire Hathaway is our largest
holding, we feel it is appropriate to share our views in some detail.

Second, we discuss some of our concerns regarding the stock market including
segments on: overall stock market valuation levels, valuation levels for smaller
companies, corporate profit margins, margin debt levels and the commoditization of
businesses.

Third, is our discussion of several positive factors that bode well for long-term
investors in stocks, despite current elevated market levels. These segments include: fewer
companies listed on U.S. exchanges, pension funds, and the overall stock allocation of
endowments.

Fourth, we discuss our views on several issues raised by our clients including the
domestic energy revolution, housing, inflation/deflation and income and wealth
inequality.

Finally, we discuss our portfolio activity including sections on preferred stocks,
municipal bonds and stocks.

THE FUTURE OF BERKSHIRE HATHAWAY WITHOUT WARREN E. BUFFETT

Berkshire Hathaway remains our firms largest holding and, while we have discussed
the company in the past, several clients have asked the question, What is the future of
Berkshire Hathaway should Mr. Buffett no longer be the CEO for a variety of reasons? In
response, we would like to share our thoughts on this unique enterprise and the irreplaceable
and extraordinary Warren Buffett who created and continues to guide the firm.

As many of our clients may know, I have followed Mr. Buffett and Berkshire Hathaway
for over four decades, though with more insight over the past three decades. It has been an
enormous privilege and pleasure watching him and Berkshire Hathaway evolve and grow in so
many ways through the years. Today, Berkshire Hathaway represents the largest holding in our
client portfolios, and we have never sold a share. As such a large holder on behalf of our clients,
I have tried to think deeply about Berkshire Hathaway both in its current structure, but even
more importantly, to when Mr. Buffett is no longer the CEO, for whatever reason. I have tried to
summarize some of my key thoughts below without going into great detail, as to some of my
concerns regarding Berkshire Hathaway without Mr. Buffett. Despite these concerns which I
discuss, I strongly believe Berkshire Hathaway is well positioned overall for a future without him.



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While I hope Mr. Buffett finds the Methuselah gene, which he has often referred to as it
would provide him another 885.5 years to live, and, if I find it, I will split the years with him
equally extending each of our lives for 484.5 years. Based upon actuarial tables he will likely live
into his early to mid-90s. I certainly hope it is even longer. I also believe a greater risk to
Berkshire Hathaway than Mr. Buffetts absence, would be a deterioration of his capabilities,
rather than his passing. However, he has given the Board approval to take away the keys if he
begins to lose his mental sharpness.

In Mr. Buffett there is embedded a broad and deep multi-dimensional set of skills that
are simply not found in any other single individual. As the founder, builder and controlling
shareholder of Berkshire Hathaway, his values and vision have been deeply integrated
throughout the organization. Furthermore, his unique, set of multi-dimensional skills, along with
his history with the firm, provide him with an unparalleled capability to evaluate and assess the
many subsidiaries, management teams and acquisitions. There are some deals, from the
purchase of entire companies, as well as one-off deals such as during the financial crisis, that
come to Berkshire Hathaway exclusively because of Mr. Buffetts integrity, track record,
reputation and so on, that will be irreplaceable.

Berkshire Hathaway remains an extraordinary company, with a Rock of Gibraltar
balance sheet, a collection of many world class businesses, stable and growing cash flows from
diverse sources, and an outstanding team of managers leading many of its businesses.
However, when Mr. Buffett (who is irreplaceable) is no longer the CEO, what will that mean for
the future of Berkshire Hathaway?

In assessing the future, I have tried to consider the historical evolution of both Mr. Buffett
and Berkshire Hathaway to gain some insights as to how best to prepare for that future without
him. In Ralph Waldo Emersons words, Every institution is the lengthened shadow of one
man. No organization better exemplifies that quote than Berkshire Hathaway. However, Mr.
Buffett has done an outstanding job, fundamentally transforming the company over the
years so that today the company is far less dependent upon him than ever before in
preparation for when he is gone.

There are four areas of focus in my thoughts: corporate governance, leadership,
operating structure, and valuation, each of which I will address.

Under Mr. Buffetts leadership, corporate governance has been exemplary on every
count as measured by evaluating the following four areas:

1. Rights and equitable treatment of shareholders and all stakeholders;
2. Role and responsibilities of the Board of Directors;
3. Integrity and ethical behavior;
4. Disclosure and transparency.
Given Mr. Buffetts demonstrated track record of excellence in each of these areas,
Berkshire Hathaways corporate governance, while non-traditional, has been relatively
unchanged. Given BRKs current corporate governance, it will be more difficult to prevent
changes in the future under new leadership due to government regulators and external forces
that will not be as forgiving as they have been under Mr. Buffett. For example, Berkshire
Hathaways disclosure and transparency based upon the firms SEC filings, and annual reports
actually offer very little information relative to the enormity of the organization.


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Mr. Buffett has often indicated that his role will be broken into two separate functions: a
CEO (management) and a CIO (investment). The Chief Investment Officer team will include
Todd Combs and Ted Weschler, both recruited over the past few years. Todd and Ted have
demonstrated outstanding investment skills combined with the personal characteristics that
Berkshire Hathaway seeks. Tracy Britt Cool joined the firm a few years ago and has helped
oversee several of the smaller companies in the Berkshire family. I believe that the investment
segment should consist of both an investment team (Ted, Todd, perhaps a 3
rd
investor) and an
operating team (Tracy Britt Cool and another individual) that work closely together but have
distinct roles as required by Berkshire Hathaway. The investment team would focus on investing
Berkshire Hathaways prodigious cash flows into equities, debt securities, the purchase of entire
companies, both public and private, and assisting the subsidiaries in making bolt-on
acquisitions. The operating team will be more internally focused on working closely with the top
management teams of many subsidiaries. The investment and operating teams will work
collaboratively to enhance the collective knowledge and improve Berkshire Hathaways
investment and operating performance. Furthermore, working together they may find new ways
to enhance Berkshire Hathaways future cash flows and management depth. Having both a
talented investment team (externally focused) and operating team (internally focused) with
some overlap will provide Berkshire Hathaway with a fuller complement of skills to better serve
the company in various ways.

The new leadership of Berkshire Hathaway and the many operating companies will
present challenges going forward that cannot be understated. The new CEO will simply not
have the historical background, extraordinary set of skills, and broad freedom that Mr. Buffett
has appropriately gained from a multitude of experiences and constituencies over the years.
However, with the collective synergies of a very talented group of leaders working together,
Berkshire Hathaway can be expected to prosper and grow.

The operating structure of Berkshire Hathaway should be more formalized, while
maintaining the unique corporate culture, decentralized operating subsidiaries and centralized
corporate resources and cash allocation (above defined levels).

Finally, Berkshire Hathaways valuation remains below its intrinsic value as measured in
a variety of different ways: float based model, two column approach, multiple of book value, or
combinations of these valuation methods. On September 26, 2011 Mr. Buffett instituted the first
repurchase program in the companys history to buy back stock when it trades for a 10% or
lower premium to stated book value. On December 12, 2012 this price limit was increased to
1.2x book value and the company repurchased $1.2 billion of stock in one transaction. This has
effectively placed a floor on Berkshire Hathaways stock price which we believe remains far
below intrinsic value. While I have mentioned several approaches above, my preferred
approach would be to value the float and then value each individual company within the
Berkshire Hathaway family based on their individual financials, and the qualitative
characteristics of each to determine their likely value to a rational private buyer. The result
would be a much higher price for Berkshire Hathaway than the current price or any of the values
generated from the earlier methods discussed above or in the example illustrated below.

A sum of the parts valuation done by Keefe, Bruyette & Woods which utilizes a valuation
for the float and combines it with a valuation for the various operating companies using price
earnings multiples follows.



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With regard to Berkshire Hathaways valuation, we believe the company is clearly worth
significantly more than its 1.3x stated book value or the valuation above. Both understate the
value of many of Berkshires outstanding businesses as they are lumped together in segments.
Furthermore, should acquiring companies be either strategic or private equity, the valuations
could be much higher given cost cutting and other synergies that could be achieved leading to
higher individual company valuations. Accordingly, we believe that Berkshire Hathaways
valuation is significantly greater than the current stock price.

Lets assume that Mr. Buffett is no longer the CEO. Several changes will be made over
the ensuing year or so, with some immediately and others taking longer, but which will inevitably
take place.

First, a new CEO will be appointed. I believe that will be Ajit Jain with two backup
candidates. Second, the Board of Directors will be reconfigured over time. Third, several of the
CEOs of subsidiaries will retire. Fourth, new CEOs and leaders will need to be chosen to
replace the departing CEOs. Fifth, a dividend will most likely be instituted to reduce the need to
invest the prodigious cash flow coming into headquarters. Sixth, while historically, divisions
were managed to generate excess free cash flow to send back to Omaha, going forward some
of that free cash flow will be redirected toward building the enterprise via bolt-on acquisitions
and internal growth. Seventh, the stock price will probably decline 10-20% or more, which, in my
view, will present an extraordinary buying opportunity.

The new CEO will be managing more with a dividend focus and improving operations
internally within Berkshire while also focused upon buying entire companies along with Todd
and Ted. Mr. Buffett often states that his job is to allocate capital and determine the
compensation of the top management teams at the subsidiary level. I believe the new CEO will
also do both but in a more collaborative way with Todd, Ted and even other executives.

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Structurally, while currently many of the CEOs report directly to Mr. Buffett, the new
CEO will need a more formalized structure to facilitate his (her?) ability to lead Berkshire. The
large subsidiaries such as BNSF, Iscar, Lubrizol, Marmon, Mid-American and Geico will
continue to report directly to the new CEO. I have outlined a structure at the end of this letter as
to how this might appear. The remaining companies need to be segregated and placed under a
separate group president. Segregated areas might be housing related companies,
manufacturing and service firms, and retail operations, to name three. Some of this is already
being implemented by Tracy Britt Cool, but going forward I believe this would help the new CEO
in dealing with the managers that oversee many of those businesses, rather than as with the
current structure where they all report to Mr. Buffett. The role of each group president will be
having several subsidiaries reporting to them, creating very little bureaucracy, yet still providing
the subsidiaries with a thoughtful executive from the outside to bounce ideas off of and to
enhance their leadership. Each group president would have several of the 60 operating
subsidiaries reporting to them and they will in turn report to the new Berkshire Hathaway CEO.
This will enable Ajit, or whomever, to remain focused on the insurance operations, by simplifying
his responsibilities with a minimal number of direct reports-the fewer the better.

My biggest concern relates to the new generation of operating subsidiary management
teams and keeping them in place. Many of the original managers that sold their companies to
Berkshire Hathaway were in unique positions, very different from those the next generation of
leaders will face. These original managers sold their firms to Berkshire Hathaway for many
reasons: avoid going public, avoid private equity which would need a liquidity event in the years
ahead (going public or sale), liquefying their wealth from the firm for cash to diversify and for
estate tax planning purposes, maintaining autonomy, finding a permanent home, and being
knighted by Mr. Buffett an enormous honor. These original managers love Mr. Buffett for these
as well as other reasons. However, the new generation of managers will likely not feel the same
loyalty or, frankly, love for the new CEO that their predecessors felt for Mr. Buffett. We are
concerned as to whether the new management teams will remain as loyal to the new Berkshire
Hathaway as the prior leadership.

Despite Mr. Buffett being unquestionably the greatest investor who has ever lived and
given his excellent track record in choosing people, I believe that Todd and Ted were excellent
choices and will do a terrific job allocating capital in the years ahead. Certainly, they cannot
replicate Mr. Buffetts success given the anchor of size and the unlikely probability that, while
they may be outstanding, they will not be as extraordinary as Mr. Buffett. I also think their role
should include visiting potential Berkshire-like companies that fit into the Berkshire Hathaway
profile to learn about the respective businesses and also to build relationships with management
teams/owners of both public and private firms keeping their names at the top of the list should
that company decide to sell. Berkshire Hathaway is unique in many ways, including its financial
strength and quasi-permanent capital, providing the company with the capacity to do deals of
enormous size while still providing a unique blessing available to few investors -- the great
option of doing nothing unless potential investments meet all of their parameters.

Todd and Ted along with the new CEO will work together on large acquisitions for
Berkshire Hathaway of both private and public companies, while also assisting in searching for
appropriate subsidiary bolt-on acquisitions. Historically, Berkshire Hathaway typically acquired
100% ownership of companies. A few exceptions were Mid-American, Iscar and Fechheimer,
where a portion of the equity was left in the business to incentivize management teams going
forward. I believe that it will be more common in the future without Mr. Buffett and I believe it
will be prudent for BRK to structure more deals this way so great leaders and management
teams can financially participate in what they are helping to build beyond just earning a salary,
albeit a very generous one. I believe that the investment team would benefit from traveling to
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meet companies both public and private to learn more about their businesses and to meet
management teams always building relationships in the process, which could yield solid
acquisition opportunities over time. There is nothing like meeting people in person to build upon
relationships and to learn about businesses, and Berkshire Hathaway should place a greater
emphasis on this kind of ongoing focus. Major banks and brokers structurally define such
activities as an important means of staying in touch and generating new prospects. BRK could
and should implement some sort of similar ongoing program.

Historically, many of the Berkshire subsidiaries were managed to maximize free cash
flow to send to headquarters. Going forward they will be more focused upon using that free cash
flow to invest in internal capital projects and bolt-on acquisitions before sending excess free
cash to headquarters. This represents a meaningful change for many of the management teams
requiring a broader set of skills in building and growing an enterprise rather than just managing
for free cash flow to send to Omaha.

Can the new leadership at Berkshire Hathaway continue to maintain the delicate balance
of decentralized operations at the subsidiary level and yet have companies work together in
certain areas where there are mutual benefits? For example, will the furniture companies work
together to gain advantages by leveraging their collective buying power in advertising, or buying
products-Jordan in the northeast, Nebraska Furniture Mart in the mid-west, RC Willey in the
west? Will they discuss operating capabilities that they can share in the form of best practices
with their sister companies? For example, say a Berkshire company has installed SAP software
which has resulted in better inventory control, expense management, and other strengths.
Sees Candies has developed unique knowledge on handling part-time work forces. Is this being
shared with other sister companies? Will the various companies within Berkshire benefit from
these best practices and utilize those to enhance each of their own operations? However, this is
a very delicate balance that needs a few unique individuals to assure that the decentralized
culture is not adversely impacted in any way, being that this has been an important aspect to
sustaining the magical Berkshire Hathaway culture. My sense is there are many areas, where
money could be saved if companies shared best practices and leveraged their buying power in
certain areas, which would result in the creation of significantly increased excess cash flows.
Surely there will be important benefits from a greater emphasis on cross company collaboration.

I also believe that many of Berkshires strengths are not fully utilized by the operating
subsidiaries as much as they could be, leveraging Berkshire Hathaways competitive
advantages to the benefit of subsidiaries could present opportunities on several fronts from its
balance sheet to issues raised above with sister companies learning and helping one another to
improve in various areas. What are the true benefits of being part of the Berkshire Hathaway
family, and how will these be more fully utilized?

I remember interviewing Ed Schollmaier, the former CEO of Alcon Laboratories. In that
interview Ed repeatedly mentioned the enormous benefits of being owned by Nestle, whose
deep pockets provided Alcon with the luxury of a long-term horizon, enabling the firm, to grow
and build its businesses without the short-term requirements of dealing with Wall Street. Today,
Alcon is the dominant player in the eye care industry and leads in virtually every area in that
field. Ed attributes their success to many factors, but among the most important has been the
many benefits of Nestles ownership. How can Berkshire better exploit these types of benefits
for its own subsidiaries? Certainly a great deal of this may already be in place, but I am sure it
could always be enhanced and improved.

I should mention Bill Gates as a member of the Board being one of the only individuals
in the world with the global stature, reputation and intellect likely to play a key role as a potential
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chairman of Berkshire Hathaway working along with the non-executive chairman Howard
Buffett. I expect Bill Gates will continue to play such a role in the BRK hierarchy given his age,
love for Mr. Buffett and his desire to sustain Mr. Buffetts long term goals for the company
helping to assure that Berkshire remains well managed, and presumably reflect a continuing
escalation in the stock price. The higher the BRK stock price the greater the value of charitable
contributions of Berkshire Hathaway stock donated to the Bill and Melinda Gates Foundation
which, in turn, will lead to positively impacting many more lives around the world.

Berkshire will announce the payment of a dividend after Mr. Buffett is gone, with an
immediate and meaningful rise in the stock price given that many large institutional investors
and other investors that have mandates forbidding the purchase of non-dividend paying stocks
will then be able to purchase the most solid dividend payer in the world. BRKs diverse set of
revenue streams and Rock of Gibraltar balance sheet promise continued ability to sustain a
major dividend flow.

Berkshire Hathaways unique culture is unlike any other business that I can recall over
the past 50 years. It remains to be seen if this incredible institution built by Mr. Buffett can
survive him, and if so for how long, given that few if any past conglomerates have survived,
including Teledyne, Gulf & Western, ITT and several others. While Berkshire is far different and
unlike any of these earlier conglomerates, there are many forces both internal and primarily
external that could lead to the potential possibility of a total or partial break-up of the company.
While the probability remains low in the short term after Mr. Buffetts passing, the possibility
rises years later for various primarily external reasons such as losing the controlling shareholder
and many other large current stockholders that have remained very loyal in the past. A new and
large short-term focused shareholder could be one example that could potentially present future
challenges to Berkshire Hathaway, particularly if the firm is not performing as expected.

In the chart below, I briefly list a simple possible breakout of segments reporting directly
to Ajit Jain. This certainly has many variations for example the smaller companies area is
currently or could be run by Tracy Britt Cool while the other three larger groupings could be
combined into two rather than three. Nevertheless, I think the operating structure needs to be
simplified for the new CEO as no individual can operate Berkshire Hathaway as Mr. Buffett has.


9
In conclusion, BRK remains, in our view, perhaps the most compelling and
deserving holding in almost any long-term portfolio, with or without the extraordinary
leadership it has enjoyed throughout the reign of Warren E. Buffett.

Stock Market Valuation

Over the past 16 years, since 1997, the U.S. equity markets have fluctuated a great deal
with significant volatility, as illustrated in the table below.

S&P 500 Index at Inflection Points


As the table above illustrates, there were three distinct periods, beginning in 1997 and
ending in 2013 with stock market values rising 106%, 101% and 173%, respectively, with
declines of 49% and 57% in between. We are not market prognosticators and we are not
predicting another precipitous decline. However the above table illustrates this volatility, which
has been common in the stock market over the past 16 years. One must remain mindful of that
going forward.

Several stock market valuation measures for the S&P 500 index and how they compare
over multi-year periods is given below.


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Overall, the stock markets recent rise since the bottom in March 2009 has been broad
and deep, as illustrated in the following table.

Returns and Valuation by Sector



As the market has continued its rise, we continuously evaluate the growth in company
earnings and dividends, as well as the price earnings multiples applied to those earnings. We
always become more concerned when the multiples expand faster than the growth in earnings,
and that has begun to take place over the past couple of years. As the tables below show,
stock market multiples have accounted for the majority of the increase in stock market
valuations both domestically and abroad, far more than the increase in company
earnings. This situation is unsustainable for long periods of time. Going forward earnings
need to rise to continue to justify valuation levels.

Sources of Total Returns

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Finally, with regard to stock market valuation, we like to consider Mr. Buffetts preferred
method for evaluating total stock market valuation as a percentage of Gross Domestic Product
(GDP). The following two tables reflect the stock market capitalization to GDP, as of December
2013, and also compare the stock market valuation as measured by the Wilshire 5000 and US
GNP for the years 2009 through 2013.




12
Mr. Buffett prefers that the ratio of stock market capitalization to GDP be in the 70-80%
range, or lower. Historically, this condition has yielded outstanding long-term returns. Today,
this measure is 109%, significantly above his preferred target range of 70-80%.

Valuation Levels of Smaller Companies

Our preference is to go wherever values are most attractive regardless of company size.
That said, we do prefer smaller companies for several reasons.

1. Companies with market capitalizations between $1 - $10 billion, are typically
our sweet spot and represent the largest percentage of companies we own in
our client portfolios. The reason for this preference is that these companies are
small enough to have significant growth potential for years to come, while at
the same time having broad and deep management teams, product diversity,
geographic diversity, and solid balance sheets. Often times much smaller
companies lack many of those components and much larger companies simply
lack the outstanding long-term growth prospects.

2. It has been very difficult over the past few years to find smaller capitalization
companies that meet our valuation parameters. The tables below illustrate that
small capitalization companies are currently significantly more expensive than
larger cap companies.


Nevertheless, while larger capitalization companies are more attractive on a valuation
basis, we will remain diligent in our search for high quality smaller companies patiently waiting
for them to come into our price range.



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Corporate Profit Margins

The two tables below illustrate that corporate profit margins are at all-time highs, having
risen significantly throughout the recent economic recovery. The first table shows corporate
profit margins for the S&P 500 companies and the second table depicts after-tax corporate
profits in the third quarter of 2013 which topped 11% of GDP for the first time since records
were being kept in 1947.




Two primary factors that have accounted for the large increase in corporate profitability
are a significant reduction in net interest payments and a reduction in corporate income taxes,
both as a percentage of sales, as illustrated in the table below.


14
Finally, based upon earnings before interest and taxes (EBIT) of GDP, the current 15.3%
is slightly below peak levels achieved in 1984 (16.7%) and 2006 (16.4%), as shown below.



Margin Debt Levels

New York Stock Exchange margin debt (borrowing to purchase stocks) is once again
approaching $450 billion, close to the peak it achieved in mid-2007. That was before the
financial crisis hit and above the margin debt levels achieved during the 1999-2000 bull market.
The table below illustrates the most recent margin debt levels as of year-end 2013.



While we are not making any predictions, we wanted to point this out as we remain
concerned that investors are borrowing heavily to purchase securities, and the prior two
peaks in margin debt levels, did not bode well for future stock market returns.


15
Commoditization of Businesses

I stated in a letter several years ago that businesses are becoming increasingly
competitive and barriers to entry are declining as technology, among other factors is leveling the
playing field enabling smaller companies to effectively compete against larger firms. Recently,
Rupert Murdoch stated, The world is changing very fast. Big will not beat small any
more. It will be the fast beating the slow. I think his quote perfectly captures what is
occurring in a broad range of industries around the globe, including cable television, broadcast
television, retailing, banking and many other industries.

It is becoming increasingly difficult to evaluate businesses and the industries in which
they compete to gain confidence in the future, given the speed of change going on around us
and the magnitude of that change. To illustrate in the retail industry the United States has 31
sq. ft. per capita of retail space compared to the United Kingdom with ten, Japan with seven,
and Germany with two.


Given the pressure being placed on retailers by online marketing companies, such as
Amazon, retailers are finding it increasingly difficult to compete. Competition is further intensified
by Amazons aggressive pricing resulting in low to non-existent profit margins for the firm. The
result could be a decline in the massive over supply of retail floor space in this country as more
and more consumers purchase products using the Internet benefiting Amazon and other online
companies that lack the more expensive distribution model utilized by traditional brick and
mortar retailers.

An even greater challenge going forward is that technology is changing consumer
behavior and, when behaviors change, the results can be catastrophic for industries.
Furthermore, these changes are happening more rapidly and with far greater magnitude. Each
of the industries I have mentioned above -- retailing, banking, cable, and broadcasting -- are
fundamentally being transformed and it is very difficult to clearly see their futures. This has
made our job, as investors on behalf of our clients, more difficult requiring more qualitative work
to gain differential insights in order to see around corners and better assess the future.
Valuation will always remain our focus by purchasing securities with a solid, margin of safety.



16
Below is a table that also illustrates the excess retail space we have in the United States
relative to the rest of the world.



Sears recently announced the closing of its flagship downtown Chicago store. Other
store closing announcements include Macys and JC Penneys, as well as a reduction of
employees at Targets headquarters in Minneapolis. Retail square footage may be reduced by
one-third to one-half over the next decade.

These retailers will have to transform themselves from solid brick and mortar operations
to become adept on the Internet as an additional way to better serve all their customers. I
recently read that no indoor mall has been built in this country since 2006 and I dont know if
that is accurate. Regardless, indoor malls are the ones facing the greatest challenges; even
more so than stand-alone stores, strip malls, and outlet centers.

As Mr. Buffett so eloquently described in his 1999 Fortune article, The key to
successful investing is not assessing how much an industry is going to affect society, or
how much it will grow, but rather determining the competitive advantage of any given
company and, above all, the durability of that advantage. The products or services that
have wide, sustainable moats around them are the ones that deliver rewards to
investors.

Fewer Companies Listed on U.S. Exchanges

Interestingly, over the last 20 years, the number of companies listed on the U.S. stock
market exchanges has declined significantly, as shown in the following table.


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The number of companies peaked in 1997/1998 at just under 9,000 and has fallen to
4,916 towards the end of 2013. This supply/demand issue has had implications and perhaps
contributed to rising stock prices.

In describing the significant decline in the number of companies listed on U.S.
exchanges, the majority of the decline has come from mergers and acquisitions as shown in the
following table.


Pension Funds

Over the past several years, many corporate defined benefit pension plans went from
being fully funded to 20-30% under-funded, resulting from the 2008 financial crisis. Fortunately,
2013 was a strong year for corporate defined benefit pension plans, as strong investment
performance combined with higher discount rates has helped shrink the pension obligation and
increased the value of plan assets. This has resulted in a significant improvement in pension
plan funded status, as shown in the table below.



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It is estimated that the funded status of pension plans of the 267 companies in the S&P
500 that provide detailed pension disclosure, rose by $328 billion to $94 billion underfunded
(94% funded) at the end of 2013 from $422 billion underfunded (77% funded) at the end of
2012.

We believe that stronger more fully funded pension plans will enable companies to
generate higher accounting earnings due to lower pension costs, positively impacting earnings
on the income statement, and reflecting lower pension liabilities on balance sheets. All these
factors are positive for corporate America going forward into 2014 and beyond. This will result in
more free cash flow for companies to buy back stock, pay dividends, pay down additional debt,
make acquisitions or re-invest internally when attractive opportunities present themselves.

Furthermore, investing in stocks remains a very attractive option for pension funds
going forward.

Stock Allocations

There has been a large reversal in the asset allocation of endowments over the past 10
years, as illustrated below.



We believe this shift of endowment assets from equities to alternatives including private
equity, hedge funds, timber, and other investments can present significant challenges. While
alternatives can be an attractive asset class for those institutions that have the time horizon and
the balance sheets to deal with illiquid investments for many, many years. Liquidity, which is
often taken for granted, vanished during the financial crisis at which point many endowments
were forced to sell at bargain basement prices. Combined with their high fees, lack of
transparency, and long-term commitment of 5 10 years, as well as the illiquidity described
earlier, many challenges remain in these alternative asset classes.

We believe the decline in equity allocations will reverse in the years ahead
resulting in rising allocations to stocks, with positive long-term implications for stock
market investors.


19


U.S. Energy Revolution

Daniel Yergin, the outstanding writer who wrote: The Prize; The Epic Quest for Oil,
Money, and Power, for which he won the Pulitzer Prize, recently discussed how gas and oil
coming from Americas shale is fundamentally changing the global energy markets. This has a
broad range of implications for countries around the globe. Not only is it impacting cost
structures in many industries, but also has a profound impact on global politics, such as
Americas role in the Middle East to name one.

U.S. gas prices today are a third of those in Europe and one-fifth of the price paid in Asia
resulting in significant competitive advantages for our country. Tight oil, which comes from
shale, utilizing the same technology as shale gas, has raised U.S. oil production 56% from just 5
years ago and is larger than the output of two-thirds of OPEC countries. It is estimated that the
United Sates will overtake Saudi Arabia and Russia in the years ahead and become the worlds
largest oil producer. Furthermore, our need to import less oil has had a profound impact on our
budget deficits. In fact, as the table below illustrates, federal deficits have declined from almost
10% of GDP in 2009 to 4% in 2013 helped by a number of factors, including a slowly improving
U.S. economy, as well as a large reduction in oil imports. Hopefully, that will continue to benefit
the U.S. on many fronts.



I stated in my semi-annual letter that despite the many challenges we face the United
States remains the best house in a much challenged global block. I particularly focused on
innovation in our country and how our unique ability to create and innovate has historically
positioned us well throughout the world. The shale energy revolution is another shining
example of American creativity and innovation, which is profoundly impacting global
economic and political power much to our benefit.

Housing

Despite weak sales of new homes in the month of December, the Census Bureau
reported that annual sales of new homes for the full-year 2013 were up 16.4% from 2012.
Thus, annual new home sales in 2013 of 428,000 were the highest level since 2008, as the
following table illustrates.



20
Annual New Home Sales
Year Sales (000s) Change in Sales
2004 1,203 10.8%
2005 1,283 6.7%
2006 1,051 -18.1%
2007 776 -26.2%
2008 485 -37.5%
2009 375 -22.7%
2010 323 -13.9%
2011 306 -5.3%
2012 368 20.3%
2013 428 16.4%

Despite a solid 16.4% increase from 2012, the table above illustrates the significant fall
off in annual new home sales from the peak in 2005 of almost 1.3 million to the bottom of only
306,000 in 2011. Like the rest of the economy, housing continues to slowly improve, but like
employment is still well below the peak levels achieved several years ago.

Despite the sharp increase in new home sales over the last couple of years from the low
in 2011, 2013 is still the sixth worst year for new home sales since 1963, as shown in the table
below.
Worst Years for New Home Sales since 1963
Rank Year New Home Sales (000s)
1 2011 306
2 2010 323
3 2012 368
4 2009 375
5 1982 412
6 2013 428
7 1981 436
8 1969 448
9 1966 461
10 1970 485
11 2008 485

21
Given the high levels of unemployment, as well as significant school debt owed by
recent college graduates, the level of household formations remains below historic levels of
800,000 to 1 million per year and, therefore, as the economy continues to improve, new home
sales will continue to rise in the next several years, albeit slowly, to a more normalized level of
700,000 to 1 million per year.

Housing remains an important barometer for the well being of our economy and employs
many people both directly and indirectly. For the housing market to continue to improve
employment needs to rise and household formations need to increase with more college
graduates moving out of their parents homes into new homes. As the housing story continues
to brighten, and it will, more first time homebuyers need to come into the market to represent a
larger percentage of the purchases replacing investment firms and investors purchasing with
cash. It is the latter that have represented a significant portion of buyers throughout the country
particularly in those markets that experienced the largest declines, Florida, Arizona, Nevada and
California. Existing home sales were also adversely impacted by the financial crisis, as were
new home sales, as the following table illustrates. Current real estate sales in all of these
markets have shown encouraging increases in recent months.



Looking forward to 2014, we believe housing will continue to improve and the shift
towards renting, rather than buying homes will also continue in 2014, as it has over the past few
years.
In a typical healthy real estate market, home buyers with mortgages comprise 80-90% of
the market, with cash buyers less than 10%. In the past few years, mortgage buyers have
represented 60-70%, while cash buyers have represented as much as a third or more,
depending upon the market.

Another bright spot for future homeowners is low mortgage rates. While they have
increased over 100 basis points for 30-year fixed-rate mortgages to 4.5% from 3.5% -- they still
remain attractively low by historic standards, resulting in a low median of housing payments
compared to income over the past several years as the chart on the following page illustrates.




22


Home prices across the United States at the end of the third quarter of 2013 were at the
same level that they had reached by the end of the second quarter of 2005, more than 8 years
ago. Only now are they rebounding to more normal historic levels. It is estimated that the
number of shared households, as a percentage of total households (that rose to 24 million in
2011) has declined to 23.5 million and will continue to decline as the unemployment rate for 25
34 year olds also comes down, as shown in this chart.



The Blackstone Group, a leading private equity firm, has spent almost $7.5 billion
acquiring 40,000 homes in the past 2 years, creating the largest single family rental business in
the U.S. Blackstone has begun issuing bonds backed by lease payments generated from these
lease rentals. It is estimated that Blackstone, along with hedge funds and other private equity
firms and real estate investment trusts, have raised over $20 billion to purchase as many as
200,000 homes to rent over the past few years after prices plunged from the 2005 2006 peak.
Demand for rentals has grown steadily, fueled by many that went through the foreclosure
process, leaving large numbers that are unable to qualify for a mortgage, or those who simply
are not ready to settle in.

23

The homeownership rate, which peaked at over 69% in June 2004, has declined to 65%
today. It is anticipated to stabilize in the 62-63% range over the next few years, resulting in more
than 2 million households becoming renters. Wall Street continues with its innovative ways to
create products, as securitizing rental cash flow is the newest Wall Street twist since the
financial crisis in 2008. It appears there will be solid demand for these rental bonds given their
payment of higher yields than government backed mortgages and other fixed-income
instruments. As with all securitizations, there are concerns with rental securitizations including
liquidity risk and operating risk. This new Wall Street phenomenon has been named the
institutional buy-to-rent industry, which today approximates just under $20 billion in size and is
estimated to reach over $100 billion within the next several years.

Inflation or Deflation

While we make no predictions regarding potential inflation or deflation and certainly do
not make investments based on our macro views of inflation or deflation, we do seek out
businesses that have the capability to raise prices in an inflationary environment, which applies
to only a few great businesses.

Recently in looking at personal consumption expenditures (PCE) which is the Feds
preferred inflation measure, the PCE price index had grown less than 1% in 2013, the lowest
growth on a quarterly basis in inflation since 2009. In fact, many economists refer to the current
situation based on this measure of PCE as disinflationary, as shown in the following chart.



The result is very tame inflation, even collectively below the 2% Fed target. Europe is
also experiencing deflationary challenges. Again, while we do not make any predictions, we
remain concerned because deflation can lead to long-term downward spirals, as prices
of goods and services continue to decline with consumers waiting to buy at ever lower
prices. This can be very devastating for a country and, frankly, the entire world.

In a recent article from Morgan Stanleys former Asia-Pacific economist Andy Xie, he
discussed in detail issues related to deflation, specifically stating that while demand is local,
supply is global, and that has had a profound impact on how economies work around the world,
including our own U.S. economy.



24

While demand is and always has been local, the supply side has become genuinely
global, as both manufacturing based blue collar jobs and many white collar jobs can be placed
anywhere in the world. With todays information technology, companies can employ people
throughout the world in research and development, marketing, accounting and finance, as well
as management, resulting in declining prices for most goods and services on a global scale.

Income and Wealth Inequality

Over the last couple of years there has been a great deal of discussion regarding a two-
tiered economy, one for those well-educated and benefiting from the technological changes
occurring in our economy and around the world and the challenges faced by more traditional
areas such as manufacturing and blue collar jobs.

Two tables below illustrate the inequality in our society. The first compares the share of
income owned by the top 10% in the U.S., as well as several other countries, and the second
compares the share of wealth owned by the top 10% in the U.S. and several other countries.



The tables above illustrate that the top 10% of income earners in the United States earn
48% of our countrys income, while the top 10% in the U.S. control 74% of all wealth. This
disparity has been growing since 1970. In addition to the large disparity in wealth, real median
household income in the United States has declined from $56,000 in the late 1990s to $51,000
today, which is equivalent to the same real median household income achieved in 1989 as
shown on the chart on the following page.

25


Portfolio Activity Fixed-Income and Equities

During the year, we sold our long held Washington Post position and Westamerica
Bancorp.

Westamerica Bancorp is one of the finest banks in the country. However, the stock was
selling for 3.5x tangible book value and 19x earnings, both representing excessive valuation
levels. Furthermore, the net interest margin continued to decline from 5.11% over a year ago to
under 4% today. Finally, with no growth in loan volumes and limited opportunities in the
investment portfolio, we felt it was time to sell at a gain of over 40% including dividends.

I discussed our sale of the Washington Post in detail in our last letter. Other sales were
very light trims of our Bed, Bath & Beyond, Brown & Brown, Mohawk, UnitedHealth Group and
Wells Fargo holdings.

We purchased U.S. Bancorp and Wells Fargo after they had declined in mid-2013, as
well as purchasing World Fuel Services and three bank preferred stocks that we believe present
an attractive risk reward for our clients, which I discuss in greater detail below.

Portfolio Activity - Preferred Stocks

We have purchased the preferred stocks of three outstanding banks with the specifics
illustrated below.

Company Original Coupon Current Yield Adjustable Rate/Date (if not called)
US Bancorp 6.5% 6% 1/15/2022 3-month LIBOR + spread 4.468%
PNC 6.125% 6% 4/30/2022 3-month LIBOR + spread 4.0675%
Wells Fargo 6.625% 6.3% 3/15/2024 3-month LIBOR + spread 3.69%

Historically, preferred stocks have dated back to 16
th
Century England and they were
issued in the United States in the 1850s, later becoming a major financing tool in the 1980s used
by utilities. Over the past several years, financial institutions have been the biggest issuers.

What drove our purchase decision were several factors beginning with the excellent
credit quality of the banks. We have followed each of these three banks for over 20 years and
have significant stock ownership in both US Bancorp and Wells Fargo; two of the finest banks in
the world while PNC is also an excellent bank.


26
We purchased these preferred stocks below, at, or slightly above par over the past year.
The dividend payments on each of these at purchase were yielding approximately 400 basis
points above 10-year treasury obligations and also significant tax benefits. They also begin as
fixed rate securities and convert to an adjustable rate if they are not called by the respective
banking institutions. This rare adjustable rate feature reduces both interest rate risk and the
securitys duration.

The key risks we identified here are: 1) they are perpetual securities with no maturity or
mandatory redemption date, 2) credit risk, as they are junior to most securities other than
common stock, 3) regulatory risk, as Dodd-Frank and other regulations may change, resulting in
the banks redeeming these securities early at par and, 4) tax law changes that may impact the
qualified dividend treatment for these issues.

An important benefit for our clients with taxable accounts is that these dividends
represent qualified dividend income, or QDI, and are considered dividend income for federal tax
purposes, which is taxed at favorable capital gains tax rates. For most of our clients that will be
either 15% or 20%, which now includes an additional 3.8% tax from the healthcare bills medical
surtax, resulting in rates of 18.8% to 23.8%. These rates are still well below the ordinary
income tax rates exceeding 42%.

While historically most preferred stocks did not qualify for our purchase, we believe
these three satisfy our rigid criteria and we have purchased them for accounts in which we feel
we can hold them until they are either called several years from now or adjust to the 3-month
LIBOR rate and the very favorable interest rates added to that. Furthermore, we have locked in
very solid cash flows for our clients going forward for several years at rates much higher than
available from 10-year or 30-year treasuries with only minimally more credit risk. While each of
these preferred stocks is currently selling at a 4-12% premium over our purchase price. Should
interest rates rise meaningfully over the next several years, they may trade at a discount to par
or our purchase price, but we do not anticipate selling them then either. We simply focused on
locking in solid cash flows until they are either called or adjust to the very favorable adjustable
rates mentioned.

Fixed-Income / Municipal Bond Purchases

The fixed-income markets remain challenging. After over 30 years of declining interest
rates, virtually all fixed-income investments are yielding historically low yields including;
Treasury Bills, Notes and Bonds, Municipals, Corporates, Agency and Mortgage Backed
Securities, Bank Loans and High Yield Securities.

Our primary focus in our fixed-income investments remains capital preservation
and income secondarily. While rates of return remain at historically low levels, we are
unwilling to either lower our standards in credit quality or take undue interest rate risk by
purchasing long dated maturities. As a result, during the year we purchased a number of
high quality municipal bonds. The maturities of all our municipal bond purchases were typically
less than 5-7 years and the majority of our purchases carried call options which give the issuer
the ability to buy back the bonds earlier than their maturity dates. This call option feature
sacrifices some yield in order to gain greater interest rate protection. The majority of our
purchases of short duration municipal bonds are generating yields to maturity of as much as
2.5%, however, if interest rates rise significantly and the municipal bonds are not called away
early, the yield to maturity rises to over 4% resulting in taxable equivalent yields for many of our
clients of over 6%. With rare exceptions, we always hold our fixed-income securities to
maturity.
27


Equity Holdings

ABBOTT LABORATORIES (ABT) is a leading diversified healthcare company
operating in the following areas: pharmaceuticals, diagnostics, nutritionals and medical
products.

On January 1, 2013, Abbott consummated the separation of its research based
pharmaceuticals business and distributed 100% of the outstanding shares of common stock of
AbbVie to the holders of record of Abbott common shares that were issued and outstanding on
December 12, 2012. Each Abbot shareholder received one share of AbbVie common stock for
every share of Abbot common stock held. The Abbott shareholder also received cash in lieu of
any fractional share of AbbVie common stock resulting from the distribution.

Abbott common shares now trade under ticker symbol ABT and shares of AbbVie
common stock trade under ticker symbol ABBV. The new Abbott is a diversified global
healthcare company with several leading franchises. In 2012, the company generated sales of
$21.5 billion from these four diverse business units: nutritionals 30%, medical products 25%,
established pharmaceuticals 24% and diagnostics 20%.

Abbott has leading market share positions in several businesses including the number
one market share in:

1. Worldwide Adult Nutrition and U.S. Pediatric Nutrition
2. Amino Acid Immunoassay Diagnostics and Blood Screening
3. Drug Eluting Stents and for
4. Lasik

Furthermore, Abbott, in addition to a broad portfolio of products and services, is
geographically diverse with 29% of sales in the U.S., 30% in other developed markets and 40%
in the more rapidly growing emerging markets. The current Chairman and CEO, Miles D. White,
will continue in these positions for the new Abbott, focused upon several initiatives including
expanding the companys products into new geographic markets, developing new technologies
and focusing on accelerating margin expansion and improving free cash flow.

The new Abbott generated 2013 revenue through its four segments of $21.9 billion with
earnings per share of $2.01. We continue to hold the new Abbott and believe its product and
geographic diversity, combined with its leadership positions in several areas, will enable the
company to continue to grow and prosper.

ABBVIE (ABBV), spun off from Abbott, represents their research-based proprietary
pharmaceutical business and is led by its highly profitable Humira franchise. Humira makes up
approximately 50% of revenues and over 70% of profits. While AbbVie is focused on growing
its pipeline, the reality is Humira, the leading rheumatoid arthritis drug, will continue to drive the
revenue and profit growth for AbbVie until some of the experimental drugs they are working on
such as its Hepatitis C virus drug gains FDA approval and enters the market. As a result, we
are reviewing our holding of AbbVie at this time given its enormous concentration on one drug.
While it continues to lead in many areas and it continues to grow around the world, it remains a
concern for us. AbbVies revenues in 2013 exceeded $18.8 billion with operating earnings of
$5.7 billion.

28
BANK OF NEW YORK MELLON (BK) is a leading trust bank with assets under custody
and management exceeding $27 trillion. They are a global leader in several segments in which
it operates. Few competitors have their global reach and scale. Approximately 80% of its
revenues are reoccurring and fee-based focused on institutional services with less reliance on
the higher credit risk from lending.

In 2013, BK generated operating revenue of $14.9 billion and pre-tax income of $3.7
billion. The banks results were helped by their continued efficiency initiatives which generated
over $650 million in annual savings. Low interest rates continue to negatively impact results as
they have over the past few years. The bank continues to work diligently on its initiatives to cut
expenses and selectively raise prices on many of its products. We believe the bank can earn
$2.45 in 2014 representing a multiple of just over 13x earnings, while paying a 3% dividend
yield.

BED BATH & BEYOND (BBBY) is the leading home furnishing retailer with just under
1,200 stores. For fiscal year 2014, which ends February 28
th
, BBBY should generate revenue
of just under $11 billion and earnings per share of $4.80.

While the stock price has declined from its high, we still believe the companys solid
balance sheet, excellent merchandising capabilities, improved focus on electronic commerce to
better compete with the Amazon threat, will enable the company to continue to prosper as the
leading home furnishing retailer in the country. The company should generate in excess of
$900 million in free cash flow and, with no long-term debt on the balance sheet and $5/share in
cash, we believe the company remains well positioned to continue its leadership position in the
home furnishing industry.

BROWN & BROWN (BRO) is a leading insurance broker with an outstanding corporate
culture that helps generate the highest margins in its industry. Net income for the 4
th
quarter of
2013 was $47.2 million, or $0.32 per share, which was a 10% increase from 2012. Total 2013
revenue was $1.4 billion, a 13.6% increase from 2012, while earnings rose 18% to $1.48 per
share.

After several years showing sparse growth, Brown & Brown has begun to grow
organically while continuing to maintain the highest profit margins in the industry. In fact, during
the 1997 to 2007 insurance cycle, Brown & Brown grew EPS at 20% per year but, since that
2007 earnings peak, organic growth slowed significantly. In fact, 2012 and 2013s earnings
growth was the best in several years and we believe earnings growth should continue in the 10-
15% range over the next couple of years; helped primarily by acquisitions.

LOWES (LOW) is a leading home improvement retailer that generated revenues of over
$53.4 billion in fiscal 2014 with net income of $2.3 billion. Diluted earnings per share should be
$2.10 and we see that rising in 2015 to $2.60/share. The company continues to generate
significant free cash flow exceeding $3 billion in 2013 providing for a solid dividend yield of just
under 2% and continued share repurchases. While Home Depot continues to perform better
than Lowes, as measured by same store sales, we believe that Lowes will continue to improve
its merchandising operations and continue to buy back significant amounts of stock and improve
its performance relative to Home Depot. Lowes stock price appreciated 40% in both 2012 and
2013 and we believe the stock price is nearing its intrinsic value. Lowes continues to
aggressively repurchase stock and we anticipate that from the 1
st
quarter of 2011 with $1.3
billion fully diluted shares, that by 2016 the number of shares will be under 800 million resulting
in a buyback of almost 40% of their shares outstanding.

29
MARTIN MARIETTA MATERIALS (MLM) is the second largest domestic producer of
construction aggregates and a producer of magnesium based chemicals and dolomitic lime.
Aggregates refer to the business of selling crushed stone, rocks and sand and is an attractive
business. It enjoys significant barriers to entry, including the challenges in gaining permits for
new quarries, as well as the low value to weight ratio of aggregates creating local oligopolies
that enable solid pricing power. As I mentioned in prior letters, it is one of few businesses I
have ever studied that have experienced enormous volume declines yet have been able to
continue to raise prices illustrating the power of their business model.

We believe that MLM is well positioned for solid growth in its largest markets, Texas
representing 19% of sales and North Carolina 17% of sales, for solid growth. Their top five
states of Texas, North Carolina, Iowa, Georgia and South Carolina represent almost 60% of
their 2013 sales. Sales in 2013 were $1.9 billion with operating earnings of $155 million
translating into fully diluted earnings per share of $2.61 on their 46 million shares outstanding.
While MLMs stock price has appreciated over 25% in 2012 and 6% in 2013, we still believe the
companys assets remain undervalued and the company will continue to generate attractive
revenue and profit growth as the undeniable need for infrastructure spending continues to grow.

MERCURY GENERAL (MCY) is the largest auto insurer distributing policies through
independent agents in California. They had a challenging but improved 2013.

Net written premiums in 2013 were $2.7 billion, up from $2.6 billion in 2012. While 2013
was an improvement over 2012 for the company, we still believe the companys outstanding
California franchise makes it an excellent acquisition candidate for several firms seeking to
growth their California operations. Furthermore, the companys excellent claims capability and
solid distribution throughout California should enable the company to return to its historical
excellent underwriting results going forward.

We have enormous respect for George Joseph, an industry legend, who is now in his
early 90s, and he, along with his ex-wife, control more than half of the 54.1 million shares
outstanding.

MOHAWK INDUSTRIES (MHK) is a leading manufacturer of flooring products whose
revenues continue to increase as the economy and, in particular, the housing markets continue
to rebound. Sales in 2013 should exceed $7.3 billion with net earnings of just over $400 million.

The company continues to aggressively make acquisitions, including the purchases of
Marazzi Group, the fifth largest producer by volume in the ceramic tile industry as well as Pergo
and Spano. Combining Mohawks existing ceramic division Dal Tile with the Marazzi Group
creates the largest ceramic tile company in the world on a revenue basis. Currently, about 9%
of U.S. flooring consumption in value is made of ceramic tiles, a much lower percentage than in
most other nations around the world. In Western Europe, tile represents 30%, and in countries
like Italy tile can exceed 55- 60%.

We anticipate continued improvement in the housing markets and in the U.S. economy.
Mohawk sales should rise to approximately $8.1 billion in 2014 and generate net income of over
$500 million or $7.10 per share.

PEPSICO (PEP) is the leading global snack and beverage company that manufactures
and markets a variety of salt and convenience snacks, carbonated and non-carbonated
beverages and foods. The company operates through four segments: Beverages North
America, Frito-Lay North America, PepsiCo International and Quaker Foods North America.

30
PepsiCos fourth quarter 2013 earnings were $1.05. This was better than expected with
stronger than anticipated volume and top-line growth, as it attained its full year performance
objectives. Revenues generated in 2013 were $66.4 billion and earnings before interest and
taxes of $9.7 billion and $4.32 in earnings per share.

We believe the company can generate in excess of $10 billion in cash flow in 2014 with
over $7 billion in free cash flow. PepsiCos return on equity exceeds 26% with an attractive 3%
dividend yield. We continue to believe PepsiCo remains a solid long-term holding with a P/E
multiple of 17x 2014 earnings.

PROGRESSIVE (PGR) is the fourth largest auto insurer in the country and generated
revenues of $17.4 billion in 2013 with operating income per share of $1.59. We project
Progressives net premiums written to exceed $18.2 billion in 2014 generating operating income
over $1 billion and fully diluted operating earnings per share of $1.60.

UNITEDHEALTH GROUP (UNH) is a leading diversified managed health care company
serving 75 million individuals and operating through two segments: UnitedHealth care, and
Optum. The UniteHealthcare segment serves employers and individuals, communities, states,
Medicare and retirement. The Optum service businesses include Optum Health, Optum Insight
and Optum RX. Overall company revenues in 2013 exceeded $109 billion with earnings from
operations of $8.9 billion and earnings per share of $5.50.

The UnitedHealth care Segment has the #1 market position in several areas including:
Medicare Advantage, Medicare Supplement, Medicaid and are #2 in commercial insurance.
Furthermore, the companys geographic and product diversity serve to reduce business risk.

The Optum segment of UnitedHealth Group is a health services business serving the
broad health care marketplace, including payers, care providers, employers, government, life
sciences companies and consumers. Using advanced data, analytics and technology, Optum
helps improve overall experience and care provider performance. Revenues for the Optum
Segments in 2013 were $37 billion with earnings from operations of $2.3 billion. Of the three
segments, Optum Insight is a leader in healthcare data analytics and generated earnings from
operations of $603 million, representing a 19% margin. The company is projecting 2014
revenues exceeding $128 billion and earnings from operations between $9.9 - $10.3 billion.

US BANCORP (USB) is one of the top 10 largest banks in the country with assets of
$357 billion at year end 2013. The company has an outstanding credit culture, resulting in few
credit losses and generates substantial fee income providing greater stability and predictability
in its earnings. In 2013 the company generated $10.9 billion in net interest income and $8.8
billion in fee income. Operating revenues were $19.6 billion and net income was $5.6 billion or
$3.00 per share.

The companys financial metrics are among the best in the industry with a return on
common equity of over 16%, return on tangible common equity exceeding 23% and a return on
assets of 1.6%. We believe US Bancorp is well positioned to continue to build upon its
outstanding franchise both organically and through selective acquisitions in the years ahead.
The company should earn in excess of $3.10 in 2014 representing a price earnings multiple of
12.5x earnings-a favorable valuation for an outstanding diversified financial institution. While
interest rates remain low, when they do rise the bank is well positioned to grow its net interest
income and margins. Furthermore, with a large fee income stream the bank is better able to
weather low interest rate periods than most competitors who lack such a large recurring fee
income stream.

31
WELLS FARGO (WFC) is the fourth largest bank in the country with assets of $1.4
trillion at year-end 2013. The company generated operating revenues of $83.8 billion in 2013
with net income of $21.9 billion and reported earnings of $3.89 per share.

The company is a diversified financial services company operating in a broad range of
markets including the east and west coasts of our country, as well as several business
segments including, banking, insurance, investments, mortgage, and commercial and consumer
finance through over 9,000 locations, 12,000 ATMs and the Internet. Wells Fargo, like US
Bancorp, also generates significant fee revenues providing a more stable and recurring revenue
stream less impacted by the declining interest rates that have negatively impacted net interest
margins over the past few years. In 2013, the company generated net interest income after the
provision for credit losses of $40.5 billion while generating fee revenue of $41 billion. Net
income for 2013 was $21.9 billion or $3.89 per diluted share.

We believe that Wells Fargos diverse business model will continue to thrive in various
economic environments and will benefit when interest rates rise, augmenting the net interest
margin to once again exceed 4%; a level it has fallen below over the past several quarters.
Nevertheless, Wells Fargo remains an outstanding financial services company generating a
return on tangible common equity of 17%, and a return on assets of 1.4%. The company also
maintains leadership positions in several businesses including a leading originator and servicer
of mortgages. In fact, the company originates one of every three mortgages in this country.

Over the next several years in a more normalized interest rate environment, we believe
that Wells Fargo can generate in excess of $5 per diluted share in earning power. We estimate
the company can earn in excess of $3.55 in 2014 and $3.80 in 2015.

WORLD FUEL SERVICES (INT) is a global leader in fuel logistics, engaged in the
marketing, sale, distribution and financing of aviation, marine and land fuel products and related
services. The company provides one stop shopping for customers in this highly fragmented
industry. World Fuel Services was founded in 1984 and in 2013 generated $41.2 billion in
revenue and $203 million in net income. We believe the company has a long runway to continue
to grow organically by expanding its customer base, geographic reach and additional product
and service offerings, as well as through acquisitions.

While a legal issue resulting from a devastating rail accident transporting oil in Canada
remains a cloud over the company, we believe the companys insurance and strong balance
sheet will be adequate to satisfy the legal claims. The company should generate earnings of
$3.20 in 2014, representing a multiple of 14x.

We want to thank you for the privilege and opportunity to serve you and we are grateful
for the confidence and trust you have placed in us. We will continue to work diligently seeking
attractive investment opportunities with a primary focus on capital preservation and a secondary
focus on achieving attractive rates of return. Wishing you a delightful springtime filled with
warmer days.

Sincerely,



Paul J. Lountzis
President