We’re Trying to Learn New Tricks

In our 2009 third quarter letter we spoke about a mistake of omission in failing to purchase shares of Kirkland’s Inc.
In referring to the actual mistakes made in the failure, we wrote, “Our second mistake was not contemplating a
reduced level of portfolio allocation to compensate for the difficult climate and nature of the business. Little
thought was given to making Kirkland’s a 5% position in the portfolio instead of our more typical 10%.” We
present to you the story of our investment in Aberdeen International Inc. as evidence that perhaps we were able to
learn from that mistake.

In mid-2010 we purchased shares of Aberdeen, a Canadian merchant bank that focuses on gold and other natural
resources companies. The company makes investments in and lends money to mostly small, often pre-producing
companies. As you might imagine, the business is not without its substantial risks and the company expects to be
compensated for the substantial geological and commodity risks it takes. In baseball terms, Aberdeen is structured
to behave more like Babe Ruth than Pete Rose.

In prior letters we have expressed our concern about the long-run inflationary possibilities of the United States’
current fiscal and monetary policies, and so we’ve spent considerable time thinking about how to best protect
ourselves against that possible phenomenon. While we don’t necessarily want to own gold directly, for a variety of
reasons, we believe that gold miners might be a possible avenue of protection. Unfortunately, many of the small
gold miners have little in the way of production and revenues and none of us are geologists. Given that back-of-
the-mind thought, an interesting company, Aberdeen, popped up on our radars. What attracted us was not only its
focus on junior mining companies, and mostly junior gold mining companies, but also the discount to the
company’s investments on its balance sheet.

We began buying shares of Aberdeen in late May at approximately C$0.35. At the time the company’s investments
per share, which included mostly public equity securities, but also included public warrants, private investments and
loans, amounted to C$0.80. Beyond the company’s investments in equity and its lending, the company also owns a
valuable royalty on a gold mining operation in South Africa that is being valued assuming gold prices substantially
below where gold was (and still is) trading and a disputed loan associated with the royalty. The investments per
share amount exclude these assets (the disputed loan may of course not be an asset) and so the company also
reports a net asset value (NAV) which shortly after our purchases was announced at C$1.19.

While we were not able to precisely value each of the company’s investments, we made the judgment that given the
large discount to stated investments per share and to NAV, the purchase of shares provided us enough of a margin
of safety. It was also an important part of our thinking that Aberdeen was launched by Stan Bharti of Forbes &
Manhattan, a private Canadian merchant bank. Forbes & Manhattan continues to be a fairly large and successful
operation on its own that has had its share of large successes. We decided to make a small bet given the
uncertainties with the precise valuation of its securities and tender nature of the companies in which Aberdeen
invests. We viewed the potential upside to investments per share, net asset value, and growth in those metrics to be
substantial and invested slightly less than 3% of our capital into Aberdeen.

At the end of the quarter the shares had more than doubled to C$0.83 per share and what is most interesting is that
the upside continues to be attractive. At the end of their third quarter, which ended in October, the company
reported investments per share of C$0.99 and NAV of C$1.33. From the end of that period, the company’s three
largest public holdings (Sulliden Gold, Crocodile Gold and Avion Gold) have collectively performed extremely well
and have added an estimated C$0.25 in gross market value to Aberdeen’s investments on a per share basis. After
taxes and performance bonuses (but before any share sales by the company), we estimate that at least C$0.15 per
share was added and so investments per share could now be closer to C$1.14 and NAV could be closer to C$1.48.
(One additional item to note is that each of these estimates does not take into account a substantial number of
warrants that were issued in the company’s IPO that would be exercised at C$1.00 per share if the company’s shares
advanced beyond that point by the middle of 2012. If the stock did advance beyond C$1.00 and assuming a static
investment portfolio, investments per share and NAV would be diluted by about C$0.30 per share.)

www.chanticleeradvisors.com
So while the shares of Aberdeen have advanced considerably, we continue to believe a substantial discount to
intrinsic value still exists and plan to continue to hold our shares. The purchase of Aberdeen shares was a direct
result of learning from our Kirkland’s mistake. While we generally continue to look for situations where we can
invest a substantial amount of our capital in a single idea, we dogs have learned a new trick. Where we perceive
substantial upside in a less certain situation, we will commit a smaller portion of our capital than we might otherwise
be inclined to commit.

Cash and Opportunity

Cash as % of Net Assets

100.00%

80.00%
Cash as % of Net Assets

60.00% 2007 2008 2009 2010

40.00%
Q1 5.57% 5.16% 0.58% 41.17%
20.00% Q2 0.12% 1.87% 2.52% 45.50%
Q3 0.53% 4.60% 9.13% 38.40%
0.00%
Q4 2.67% 1.70% 37.91% 28.47%
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010

Above is a table and chart showing our cash balance as a percent of net assets at the end of each quarter since our
launch.

A few things should stand out to interested readers:

 When we started, we held little cash and were in effect fully invested
 Over the past several quarters, the opposite has been true as we’ve held much higher cash balances
 We had little cash available to put to work when the markets were offering the best bargains in the second
half of 2008 and first half of 2009
 We had a good year in 2010 despite holding about 35-45% of the fund’s assets in cash during the year
(which, in case you haven’t checked lately, earns about nothing these days)

As can be seen above, the levels of cash have changed over the last several quarters. But has our mindset about
holding cash changed too? Yes and no. We think it is pretty clear we weren’t holding enough cash entering the
downturn in the market in the Fall of 2008. We liked what we owned and thought that if we found something
better, we could just sell the cheap to buy the cheaper. If Mr. Market quoted us stocks that were just as cheap as
those we owned, we would have a nice option to either keep the undervalued things we had, or sell part to diversify
into other, similarly undervalued securities. But the problem was that as Mr. Market’s mood changed in 2008 and
bargains became more plentiful, our holdings weren’t spared from the decline and many were sent down as much
(or more) as other interesting opportunities in the market. The heavy holdings of paper certificates and lack of
paper money caused us to miss many profitable opportunities during that time. Even a modest cash holding – say
10-15% – would have proved extremely beneficial to overall returns.

But as most residents of Earth know by now, inflation erodes the value of money over time. Cash is trash, as some
may say (especially if they own some yellow metal). In a speech last year, James Grant compared central bankers to
kids in a basement with a chemistry set. They continue with this money-creating experiment on a scale never before
seen in this country. Doesn’t this all mean that the risk of eventual inflation is too great to hold much cash right
now? Well, the good thing about cash is that it doesn’t have to remain so. It provides optionality to take advantage
of unexpected chaos, disorder, and new discoveries. There was plenty of trouble in the markets and the economy in
2007 and early 2008, but overall market levels remained overvalued on a number of metrics and many people we
respect warned of severe trouble to come. As we’ve mentioned previously, we should have paid a little more
attention to some of the big picture items, but at what point does such attention turn from prudence to market
timing (which we know we can’t do)?

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 "I am an old man and have known a great many troubles, but most of them never happened." - Mark Twain

On many reliable market valuation metrics, the stock market indices are back to what is likely significantly
overvalued territory, especially the Russell 2000. Unemployment remains high. Debt levels are still too high for
people and countries and they will eventually have to come down. Borrowing costs are rising, especially for those
European countries deemed to be in troublesome situations. Government promises to citizens to provide certain
future benefits will have to be restructured or eliminated (eventually). And all the other problems we didn’t mention
are just as real and could have a significant impact on market returns.

There are always risks and troubles somewhere. Due to a more entangled global economy and the scale of the
experimenting in the U.S. – where the fund’s investments are mostly aligned – the uncertainties and range of
outcomes might be the largest to ever exist. We don’t really know. However, we think there is a difference between
preparing for the uncertain and being blind to it, and we think that we can be a little more prepared by being
extremely discriminating in where we choose to allocate our capital and by maintaining a more reasonable base level
of cash on hand. We are not market timers and would gladly put non-invested capital to work, but we must also
keep in mind the wise words of Warren Buffett: “The less prudence with which others conduct their affairs, the
greater the prudence with which we should conduct our own affairs.”

So how should investors view our cash balances? If you see a little extra cash in our portfolio (say 10-15%), it may
be for the strategic reason of making sure we can take advantage of sudden disruptions or other opportunistic
investments should they happen along the way. But if you see large cash balances in the portfolio like we had
throughout 2010, it is more likely a combination of the strategic reasoning and us not being willing to compromise
on our buy discipline. A basic tenet of our investment process is that we look for mispricing in the market, largely
due to misunderstanding, overreaction, or looking at things that are underfollowed (most often because of smaller
size and illiquidity). When we can’t find enough mispricing, cash levels will be higher, as they were throughout
2010.

No information contained herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an
offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security, or fund. Any statements that express or
involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumptions or future events or
performance are not statements of historical fact and may be "forward looking statements." Forward looking statements are based on
expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause
actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through
the use of words such as "expects", "will", "anticipates", "estimates", "believes", or statements indicating certain actions "may", "could", or
"might" occur. Any non-factual statements, including those regarding possible future events, constitute views and/or present intentions and are
not representations or warranties and are subject to change. Past performance is no guarantee of future results and all investing involves risk.

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