Ann: Chairman's Address to Shareholders, page-5

Hi J_A_G

I've never had a look at KOV in any depth at all (albeit i'm aware of its existence) so i can't really add much to the conversation here insofar as it relates to a discussion specifically on KOV.

That said, in a market where any business of quality is generally richly valued, most of the stuff i'm spending time on at the moment is at the KOV-type end of the quality spectrum and based on a similar basic thesis, i.e. buying ordinary businesses on cyclically low earnings which are capped at cyclically low valuations (typically mid-to-low single digit EBITDA multiples). These sorts of situations obviously provide attractive returns when they work - a shift from say 4x to 6x EBITDA multiple combined with a 50% cyclical bounce in EBITDA is a 125% unlevered return, which if earned over three years is a >30% p.a. unlevered pre-tax return - but, of course, they almost never work out as per underwriting.

The biggest issue i am wrestling internally with at the moment is: how many of these deep value/low quality situations do i really want to own, and how big a part of the portfolio should they be? Does it make more sense to take a portfolio approach (i.e. buy half a dozen of them knowing that at least 1 or 2 will probably not work out), or buy just a few with higher conviction/weighting? I already own two businesses i'd unequivocally put in this bucket (GCS & MCE), and i'm looking at another that's very similar to KOV in terms of valuation and quality. In a perfect world i'd prefer to buy really good businesses at reasonable prices and hold them for a long time, but that's not easy at the moment as quality is generally very richly priced.