REGISTERED INVESTMENT ADVISOR

The Stock Market In 2014

The stock market has had an amazing run over the last six years uninterrupted in any meaningful way. It
is common place for all types of prognosticators in the media to tout that market the market is terribly
overvalued and a crash is inevitable over the next few months, and others say money is going to flood
into the stock market from investors who are tired of receiving very low returns from the bonds they
own, bond yields, or interest, are at historic lows.

Currently the stock market as a whole is priced towards the upper end of a reasonable historical range of
valuations. A couple of measures I like as a general measure of the stock market valuation are the total
value of the United States stock market divided by United States Gross National Product (30 year
average = 82%, currently = 122%, currently overvalued by this measure), and the earnings yield of the
S&P 500 – 10 year US Treasury Bond (30 year average = -1.09%, currently = 2.02%, currently
undervalued by this measure). So it is undervalued by one measure and overvalued by the other
measure. While these prognosticators may take one measure and predict with gusto and conviction the
future movements of the market, the truth is there are many variables that affect the value of the market
and no one can predict the market, least of all me.

The best way to be wrong is to try to predict the unpredictable. I try to not be wrong all the time but
especially when there is nothing to gain from being right, so I will continue the practice of abstinence as
it relates to forecasting the behavior of the general stock market. While it is prudent to understand
where you are in the business cycle, it is foolish to predict how the economy will rectify any deviation
between price and value. I will continue my efforts doing what I know and love, finding undervalued
securities. Prices may be affected by movements of the general stock market but the underlying intrinsic
values of the businesses we own will not be affected.

Result of 2014
My continuing goal in managing our funds is to achieve a long-term performance record superior to that
of the S&P 500 return with dividends, while minimizing the risk of permanent loss of capital. Unless
we achieve this goal and continue to do so when measured over a period of not less than three years then
we should be investing in a low cost S&P 500 index. The only exception I would make to the previous
sentence would be a three year period of an explosive speculative bull market, such as occurred in the
internet bubble of 1998 – 2000. During this period markets became irrational and the prices of securities
lost all relation to the underlying value. We will be a fish out of water in markets like this, for us to own
securities we demand prices that are at a discount to value and not the other way around.

I track the results of a model portfolio as a measure of our performance. The model portfolio is made up
of my personal account. Your results may differ, especially in the event that you placed money in the
fund during the year, but over time your results should match closely the results of the model portfolio.
The results of the model portfolio for 2014 are as follows:

Returns

I consider the performance of the last year to be a relatively good performance, given market conditions
that were not exactly ideal for the management style of yours truly. When the market is fully valued as I
believe it to be at the present time, it becomes more difficult to find businesses priced at a discount to
value. Difficulty will not deter our search for these businesses though.

Portfolio Developments
As I have stated it is my intent to own 10 – 20 securities that I know well. You all know the securities
held currently in your portfolios from the statements and/or by online account access. I will always limit
my comments to the positions that we have exited, explaining the rationale for entering the position and
exiting the position.

American Public Education – APEI – In late September/early October the valuations of this provider of
online secondary education became very attractive. There were headwinds for the education industry in
general, rising cost, government scrutiny to student loans, etc. However they were a leading provider at
lower cost with a solid balance sheet and no debt, and stable revenues/earnings. We purchased our
position in early October and added to that in early November. Much to our satisfaction the stock
quickly moved up and reached what we deemed as full valuation and we exited the position in the
second week of January at a 25% gain.

Teradata Corporation – TDC – This analytic data solutions company was at attractive valuations for the
majority of 2014. I felt a lot of data moving to the cloud would prove to be tailwind for this company.
Again strong balance sheet, little debt, buying back shares of the company and stable rising earnings.
We purchased in early November, however on their earnings release and conference call of February 5tt I
gathered that 2015 was going to be a tough year and I felt the valuations weren’t as attractive with the
reduced guidance as compared to 2014 and our funds would be better utilized in other opportunites. We
exited that position the following week at a 9% gain.

Teradata is an example of the importance of ensuring that you have a wide margin of safety when
investing. Although the investment didn’t develop as we thought, we still exited the investment in three
months with a 9% gain, I presume in the future investments that do not develop as planned will not be as
pleasant as this one. However the wide margin of safety will limit the pain.

I look forward to talking to you again after the second quarter of 2015. In the event you have any
questions regarding this letter or otherwise I am always happy to hear from you.
Randall S. Herion, 2/15/2015

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