Value Investing Basics

1. Value Investing Basics Andrew Boord, Research Analyst November 20, 2006 Fenimore Asset Management, Inc. 384 N. Grand St., PO Box 310, Cobleskill, NY 12043 – 800.721.5391 – www.fenimoreasset.com

2. Fenimore Asset Management, Inc. • Located in Cobleskill, NY • 32-year history of money management • $2 Billion of Assets Under Management • Separate accounts and two mutual funds • “Value” Investing in high-quality companies • About 50 - 60 investments among 4 analysts

3. What Is Value Investing? • Thoughtful, Disciplined and Patient • Preservation of Capital – First Priority • Invest in Businesses, Not Stocks • Bottom-up, Rigorous Fundamental Research

4. Investment Selection Criteria – Part 1 • High Quality Businesses • Understandable • Sustainable competitive advantage(s) – Moat • Solid Financial Condition • Low debt • Strong free cash flow:

5. Investment Selection Criteria – Part 2 • Superior Management • Honest and forthright • Understands return on invested capital • Strong track record of creating economic value (not building an empire) • Attractive Valuation • Reasonable multiple of “owner’s earnings” • Historical multiples of earnings, book value, sales, etc. • Acquisition multiples of competitors • Calculate an internal rate of return (min. of 12%-15%) based on 5-year projections and a modest terminal value

6. High Quality Business • First, Find Them • Screens • Conferences • Media • Other investors • Read, Read, Read • Study Competitors, Customers, Suppliers, etc. • Interview Management – Phone and Visits • Look at the Numbers – Build Detailed Models • ROIC • Margins • Cash generation

7. Superior Management • Hardest Piece of the Puzzle • Read, Read, Read – Shareholder letters & interviews • Quarterly Earnings Calls • Interact • Look for Independent Thinkers (a.k.a. Curmudgeons) • Cranky • Annoyed by Wall Street • Frugal • Don’t follow the herd • Avoid the Flashy • Spin all bad news • Play to Wall Street • Love consultants • Excessive pay

8. Financial Condition • Key is Surviving the “Once in a Lifetime” Economic Shocks • Asian crisis (ocean freighters) • Russian debt default and LTCM lock up (CMBS REIT’s) • Tech stock bubble meltdown (100’s of companies) • 2001 recession (airfreight carriers) • 9/11 (airlines, hotels) • Hurricane Katrina (catastrophe reinsurers) • No Debt is Safest • If There is Any Question, Then It is Not Strong Enough

9. Attractive Valuation • “Margin of Safety” • Patience – No Called Strikes • Should Be Cheap – No Matter the Valuation Method • Relative Valuations are Dangerous • Many tech stocks were cheaper than their peers in 1999 and lost 90%+ of their value • “Fearful When Others are Greedy and Greedy When Others are Fearful” • Usually cheap for a reason • Best when no one agrees with you • Best when your stomach hurts

10. What Is Risk? • Risk is Loosing Money • Dishonest management • Lack of disclosure • Commodity business (i.e., no moat) • Excessive debt • Overvalued stock • Risk is Not • Beta • Relative index weightings (a.k.a. “tracking error”) • Sticking out from the crowd

11. What We Don’t Do • Focus on the stock market • Make macroeconomic predictions • Structure portfolios relative to an index • Allow short-term company events to drive our actions • Sell a stock due to increased market capitalization, P/E, etc. • Use Wall Street recommendations • Apply quantitative modeling, momentum investing, or relative value techniques • Operate a star system

12. Other Keys • Macro-Based Investing is Dangerous • “Macro economists make astrologers look good” • “Invest as the world is, not as you think it should be” • Technical Analysis is Voodoo • Intelligence Important, but TEMPERAMENT is Key • Mr. Market • Transaction Costs • Accounting Does Not Always Equal Economic Reality • There is Always Something Wrong • Circle of Competence – You Don’t Have to Know Everything

13. The 7 Deadly Sins for Analysts • Arrogance • Cowardice • Sloth • Susceptibility to Flattery • Recklessness • Narrow-Mindedness • Isolophobia