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Dec. 2014 EDITOR: INGRID R. HENDERSHOT, CFA 1994-2014

TWENTY YEAR ANNIVERSARY SPECIAL EDITION! This issue marks twenty years of Hendershot Investments providing investment advice to our clients and the publication of this newsletter. Over this period, we have strived to provide our readers insightful market observations and -term investment principles in an easy to understand format. This special edition looks back over the last twenty years at many of the feature articles appearing in each quarterly newsletter, as we addressed the events in the world and how we applied our investment philosophy during these times to build wealth through the ups and downs of the economy. We hope you enjoy this retrospective of the past 20 years.

DECEMBER 1994: The initial publi- valued on the number of eyeballs discount to their underlying intrin- cation of Hendershot Investments viewing a website, a sic value. Following this model, outlined our investment philosophy measure that deserved a hairy we identified several other and started to build our investment eyeball! in the HI portfolio that might also portfolio with 20 stocks for the new catch the eye of the Oracle of year. Twenty years later, we still cur- In our JUNE 1996 issue, Record Omaha because of their tempting rently hold four of the original 20 Results, Year After Year, we re- valuation levels. Aware of Mr. stocks, which demonstrates our truly minded that they should Buffett’s fondness for sweets as long-term investment time horizon. keep in mind the fable of the tor- evident by his daily Cherry Coke toise and the hare when selecting cravings, we suggested that Toot- The MARCH 1995 issue featured the long-term investments. We wrote, sie Roll and Dairy Queen might article Record Share Buybacks “Racy, glamour stocks which also satisfy his sweet tooth. (Note: Bullish For The Future. While a quickly jump to big initial gains International Dairy Queen, which plethora of pessimists proclaimed the may tempt you. Over the long we owned in the HI portfolio, was market was overvalued, Corpo- term, these ‘hot’ investments often indeed acquired by Berkshire rate America was following the game evolve into harebrained holdings. Hathaway two years later in Janu- plan from the post-October 1987 ary 1998.) crash playbook and busily buying In fable lore, the bustling bunny back shares at a record pace. In poops out and becomes a hapless JUNE 1997 featured a review of 1987, these purchases allowed man- hare long before the investment the first of our 17 visits to the agement to scoop up shares at de- race is over.” We noted our prefer- Berkshire Hathaway annual meet- pressed prices and to reap the bene- ence “to bet on tenacious tortoise ing in Omaha, Nebraska, with a fits as the market doubled over the stocks...those which summary of the wise lessons next seven years. We asked, “Are deliver steady growth no matter learned from Mr. Buffett and his savvy investors rapidly repurchasing what the economic climate.” business partner, Charlie Munger. record amounts of their shares today This report would become a regu- in anticipation of an 8000 Dow follow- In DECEMBER 1996, after Berk- lar June feature following the ing the turn of the century? “ shire Hathaway had acquired meeting held in May each year. FlightSafety International, one of JUNE 1995 featured our first article our original investments, we identi- The DECEMBER 1997 issue had on the benefits of investing in HI- fied a few of our companies that us discussing a recurring topic of quality stocks that paid and increased would fit Berkshire Hathaway’s buying stocks on sale in the arti- their over time. Meanwhile, investment criteria in an article cle, When Mr. Market Behaves our SEPTEMBER 1995 issue set out titled Warren Buffett Might Like Irrationally…. We wrote, “Mr. one of our crucial investment rules, These Stocks Too! Market is an excitable chap! He is “Don’t overpay for a stock.” subject to alternate bouts of de- With a long-term perspective, we pression and ‘irrational exuber- We cautioned about inflated technol- noted Mr. Buffett’s penchant for ance,’ a well-known phrase coined ogy valuations during the dot-com identifying solid companies, like by Alan Greenspan, the Federal era. Technology stocks with little FlightSafety, and buying them Reserve Chairman. The month of revenue and no profits were being when the stocks were selling at a October for some reason always

Page 2 Hendershot Investments, 1994-2014 seems to bring out the worst in Mr. instead of sheep in their sleep. had seemed to notice their bare Market, and this past October was We wrote, “If before going to cupboards, they proudly paraded to no exception. sleep you placed an initial the party anyway with high hopes

After suffering from the Hong Kong investment of $10,000 in and little else to show. Mr. Market flu, Mr. Market woke up on Oct. 27, Berkshire stock in 1965, you threw an exuberant party with 1997, in a downright despondent would wake up today with more bubbly flowing freely from a mood. He indiscriminately sold than $50 million! Few people seemingly endless fountain. When stocks, driving the market down in recognize that Mr. Buffett, the the party finally ended, Mr. Market its biggest point decline ever. The second-richest man in the world, woke up with a dreadful hangover next day Mr. Market realized he had actually is Rip Van Winkle! and vowed, “No more bubbly!” (Buffett keeps his disguise intact been a bit rash and bought back the Once Mr. Market sobered up, he very stocks he had sold the day by regularly shaving off his long beard with razors manufactured was surprised to discover so many before. On record volume of more Internet emperors wearing no than one billion shares, the market by Gillette, a holding of Berkshire.) As simply stated by clothes! Just then a gigantic rebounded with the biggest point balloon, hanging over the bubbly gain ever. Irrational behavior? You Mr. Buffett himself, ‘We continue to make more money when fountain, popped! The emperors bet!” tried valiantly to catch a fragment of snoring than when active.’ “ ***** the balloon to cover up their MARCH 1998 featured another HI investment principle in the article, deficiencies. However, most of the As the dot-com bubble began to em-bar-assed emperors just Cash-Rich And Debt-Free Provides burst, we featured articles Opportunity where we identified streaked away, and their tulip-filled discussing the valuation and empires disappeared almost as some of our favorite investments, price of these high-flyers. Our companies that are cash-rich and quickly...never to be seen again. DECEMBER 1999 article, Which debt-free. We observed that Internet Emperor Is Really Moral of the story: Before investing financially strong firms have inherent Wearing Clothes? perhaps best in Internet stocks, determine which competitive advantages, which are described the tumble of these Internet emperor is really wearing especially noticeable in market stocks. Our story began as clothes. Otherwise, you’ll likely end downturns. Companies, which follows: up with a barren asset!” consistently generate strong free cash flows with little debt, generally “Once upon a time in Internet In MARCH 2000, our feature article provide superior land, vast empires dot-commed How Can You Tell When It Is returns. the landscape. These tulip-filled Time To Sell? provided insights empires stretched from the In MARCH 1999, we explained the into our selling strategies as we mighty Amazon to the great value of long-term investing in the rebalanced our portfolio from high- Ebay. Each time a new Internet article, The Rip Van Winkle flying technology stocks into emperor was born through an Approach To Investing, citing unloved “old economy” stocks. We initial , Mr. Market Warren Buffett’s philosophy that, “If wrote: “As Philip Fisher said in poured himself a glass of bubbly you aren’t willing to own a stock for Common Stocks and Uncommon to celebrate and giddily 10 years, don’t even think about Profits, ‘If the job has been done bestowed upon new emperors owning it for 10 minutes.” The Rip correctly when a royal riches...by doubling or Van Winkle approach starts by is purchased, the time to sell it is tripling the stocks of the fledgling identifying HI-quality companies with -almost never.’ empires. consistent, long-term growth records, high returns on equity and Soon Internet emperors were There are times, however, when strong balance sheets. By investing popping up everywhere, and Mr. prices race far ahead of business in these stocks when valuations are Market decided to throw a grand values due to Mr. Market’s reasonable, investors may then take party. The Internet emperors “irrational exuberance” about future a long nap and completely ignore realized this might be their final business prospects such as with the daily rumblings and inevitable chance to obtain further riches technology and biotechnology crashes of the market. They will from the woozy Mr. Market so stocks. You will note that we take then wake up and happily find their they all shopped for the finest partial profits then. At the same wealth is significantly greater than party clothes. Unfortunately, time, there are many stocks which when they began their hibernation. many emperors had empires appear undervalued and offer very Using Mr. Buffett’s , which generated little sales and attractive buying opportunities. Berkshire Hathaway, as an no profits. Alas, these poor Rebalancing the portfolio by example, investors over the years Internet emperors had no money trimming back stocks that appear have been counting money bags for clothes. Since no one, so far, overvalued and reinvesting the

www.hendershotinvestments.com Page 3 proceeds into undervalued stocks World Trade Center towers in corporate governance and a lack should create future long-term gains collapsed, the Pentagon burned of accounting integrity among several while reducing overall portfolio risk.” and a plane in Pennsylvania public companies brought out the

As market returned, both perished. bears. the SEPTEMBER and DECEMBER 2000 issues addressed valuation of Following the attack, the stock These grizzly bears clawed the stock stocks. In The Voting Machine VS market remained closed for four market to shreds with the three stock The Weighing Machine, we noted days, the longest period since the indices suffering losses of 25% to the sage advice of Ben Graham, the Great Depression. When trading 70%. Just as Goldilocks scurried father of , who wrote resumed, the stock market from the bears upon their return in Security Analysis, “The market is suffered one of the worst weekly home, so, too, did investors hightail not a weighing machine on which declines in decades due to it out of the stock market. the value of each issue is recorded external shocks. As prices by an exact and impersonal tumbled during the September sell Unfortunately, this fairy tale had a mechanism in accordance with its -off, it was apparent that stock sad ending with investors scared out specific qualities. Rather, it should prices were declining much more of the market right at the time when be said that the market is a voting than the underlying values of many stock valuations once again machine, whereon countless businesses. Most HI-quality became “just right.” individuals register choices which companies recognized this are the product partly of reason and discrepancy and repurchased their As we noted, long-term investors partly of emotion. The disciplined, shares.” have learned that when the bears come marching into town, playing rational neither follows Relying on our valuation popular choice nor plays market their accordions, each squeeze of the principles, we observed that accordion compresses valuation swings; rather he searches for despite external shocks, investing stocks selling below intrinsic value multiples. However, they have also in HI-quality companies made learned that the bears play oom-pa- and waits for the market to sense if purchased at a recognize and correct its errors. It pa music when it comes to HI-quality reasonable value. While it is companies. As stock prices are invariably does and share price without doubt that we will witness climbs. When the price has risen to squeezed lower, valuations become further shocks in the future, we much more attractive for businesses the actual value of the company, it is maintained that a calm time to take profits which then are that continue to generate steady assessment of individual business profitable growth and possess strong reinvested in a new undervalued values often provides good security.” (It was with Graham’s wise balance sheets. While we did not investment opportunities. We took predict when the bears would words in mind that we rebalanced comfort in the words of Mr. Buffett the HI portfolio earlier that year on hibernate again, we remained who stated shortly after the terror confident that buying HI-quality March 10, 2000. As it turned out, attacks, “There is nothing dumber this date was the exact peak of the companies in difficult times would than betting against America. It lead to happy endings after all! NASDAQ index.) hasn’t worked since 1776.” The MARCH 2003 article, When We pointed out that the tech stocks The next year resulted in more Insiders Buy, Investors Should that were trimmed back on 3/10/00 tumultuous times. Our Ask Why, chronicled the insider had declined on average 36%, while SEPTEMBER 2002 feature article, purchases made in Brown Forman, the stocks purchased with the Goldilocks And The Three Home Depot and Kimberly Clark. proceeds had gained an average Bears, used the well-known fairy 105%. While some thought Ben tale to illustrate the hazards of After three years of a bitter bear Graham’s weighing machine may failing to recognize changing market, many investors were tempted have turned rusty in the “new era,” market conditions. We compared to throw in the towel. On the other our conclusion was that it was as unwise investors to the porridge- hand, towel-wrapped corporate trusty as ever! thieving Goldilocks, falling asleep executives were coming out of the with the NASDAQ, DOW and Following the tragic events of Sept. sauna looking for their wallets. We RUSSELL indices at or near noted that in the prior quarter, 11, 2001, the DECEMBER 2001 record levels. Like Goldilocks, issue featured advice on investing insiders in these three HI-quality these investors slept as the world companies recognized the attractive during troubled times in the article changed dramatically. Investing In Stocks Despite valuations and bought shares in their companies. We suggested that when External Shocks. We wrote, “No A recession, terrorist attacks, the one will ever forget the terrible insiders buy, investors should ask threat of nuclear war, Mideast why. The answer often leads to tragedy of Sept. 11, 2001. The world tensions, a complete breakdown watched in horrified shock as the rewarding results.

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Our MARCH 2004 article, When reward investors with gold-medal hurricanes. These worries drove There Is A Bull In The China results over the long term! stock prices lower with many HI- Shop… addressed investing in quality companies now on sale.” China. The Chinese stock market In MARCH 2005 our feature had risen a blistering 81% in 2003. article proclaimed Dividends, We observed that long-term Initial public offerings were hotter Dividends, Dividends! During investors knew that the best time to than a steaming cup of Chinese tea. the previous year, companies in make hay is when the skies are However, we observed that when the S&P 500 index had paid out gray. By looking past the clouds there is a bull in the China shop, over $181 billion in dividends, a and acquiring HI-quality companies investors should be wary. We figure which did not include the at reasonable prices, future suggested that the best way to $32.6 billion special investment returns were likely to be benefit from China’s growth is paid by . Another record bright. through investments in HI-quality year was projected by S&P for companies that were successfully 2005, with dividends expected to We returned to the dividend theme doing business in China. We grow 12% to more than $200 in our DECEMBER 2005 article, identified a number of HI-quality billion. We wrote: Betting On The Big Blue Chips. companies with active participation in We explained that a “blue-chip” is the Chinese market as a way to “Despite the record levels of a stock of a well-established and invest in the growing Chinese dividends, Corporate America financially sound company that has economy. We concluded, “As a has plenty of runway to increase demonstrated its ability to pay Chinese fortune cookie might say: dividends further as S&P 500 dividends in both good and bad When there is a bull in the China firms only paid out 34% of profits times. According to this definition, shop, beware of bubbles that will last year, which was below the Johnson & Johnson, 3M, Wal-Mart pop. Instead, get rich slowly with HI- historical 54% payout ratio. A and ExxonMobil qualified as blue- quality investments.” rising dividend payout portended chip blue bloods. All of these firms

good news for future earnings had paid dividends for decades In JUNE 2004, our article, The Best with ExxonMobil paying a dividend Since 2000, noted that with the growth.” A study by Asness and Arnott in the Financial Analyst every year for more than a century. return of pricing power, HI-quality We suggested that long-term companies were reporting the best Journal the previous year found that when dividend payouts are investors seeking a deal should earnings since 2000. On the other belly up to the table and place their hand, Mr. Market was now fretting high—signaling management’s confidence in the future—solid bets on the big blue-chip stocks. over bubbling oil prices and the three earnings growth lies ahead. Patience And Discipline: The “I’s” - inflation, interest rates and Iraq. Favorable economic news was We observed that dividends Keys To Successful Investing battling with concerns over inflation— have historically accounted for appeared in our JUNE 2006 issue resulting in a tug-of-war which would about 40% of the total return of at a time when this did not seem an pull the DOW back and forth over the the stock market. With strong apparently successful approach to 10,000 line for the summer. We dividend payouts in 2004 and in wealth building. We wrote: noted that this volatility could provide early 2005, the trend of dividend buying opportunities for the long-term -paying stocks outperforming “During the past couple of years, HI investor. non-dividend-paying stocks was -quality investing hasn’t appeared likely to continue. We further to be working as investors chase In SEPTEMBER 2004, several HI- believed HI-quality dividend- ‘hot’ investments like quality companies were identified in paying stocks would fare even ‘com’modities. The last time ‘com’ When There Is A Market Drop, better. was so popular, it wasn’t a prefix Good Values Pop Up! where we but a suffix found in dot-’com.’ The noted that while market downturns Our JUNE 2005 article, The out’com’e will likely be the same. may be disconcerting, long-term Best Time To Make Hay Is investors view market corrections as When The Skies Are Gray During the dandy dot-com party, a buying opportunity. A combination noted that the market continued the clock struck midnight on March of lower stock prices and higher to provide good investment 10, 2000, with the NASDAQ index earnings results in more reasonable opportunities as we stated: “Gray peaking over 5000 while the “old valuations. With this latest market clouds have been hovering over economy” firms like Berkshire drop, good values did pop up again the stock market all year. Mr. Hathaway were hitting their yearly among many HI-quality enterprises. Market has been fretting about lows. Six years later, the dreadful These good companies with good oil prices, interest rates, slower dot-com hangover endures with the management teams were once again economic growth, junk bond NASDAQ still down more than 50% selling at good prices which should jitters and potential hedge fund while patient investors, who held

www.hendershotinvestments.com Page 5 onto HI-quality stocks like Brown- Don’t Forget Rule #1 was the finances were issued subprime Forman, Clorox, Fastenal, Genuine feature article of our JUNE 2007 loans. Loosey-goosey lending Parts and Berkshire Hathaway, had issue. As the stock market policies resulted in no seen those stock prices more than climbed to record levels, we found documentation loans (also known double in value.” it helpful to review the reasons as liar loans), interest-only loans, why the bull was charging, while negative amortization loans and We stressed that disciplined remaining mindful of lurking piggyback loans (no money down). investors don’t get carried away by liquidity, strategic and/or economic Most of these loans were bundled Mr. Market’s emotions, but rather risks that might serve as this bull’s together and sold as mortgage- patiently buy and sell investments menacing matador. Peter L. backed securities. based on underlying business Bernstein, the author of one of the fundamentals. We compared our most comprehensive books about As long as housing prices approach to that of hedge fund risk, Against the Gods: The continued to rise, everything was manager and investor Joel Remarkable Story of Risk, hunky dory for the borrowers, the Greenblatt, who in his 2005 work The discussed how risk is at the heart lenders and the investors. Little Book that Beats the Market of all investment theories. He However, as teaser and adjustable coined the phrase “Magic Formula joked that the cockroach, one of rates reset in flat or declining investing.” His approach of value the longest surviving species, has housing markets, defaults in the investing stressed our two favorite a great risk management system, subprime mortgage market spiked. concepts—good company and good “At the first sign of danger, they Borrowers were “shocked” by the price. Just as importantly, Greenblatt run like hell!” Warren Buffett, in higher payment they could not counseled patience and discipline in his latest letter to , afford to pay, lenders were sticking with this investment strategy acknowledged risk management “shocked” by the higher defaults even when it doesn’t appear to be as a key criteria for his potential and investors were “shocked” that working. investing successor. “Over time, their investments were losing

markets will do extraordinary, value. The MARCH 2007 issue, What Do even bizarre things. We, therefore, You Know, Another LBO? need to find someone genetically As highly leveraged financial discussed the amount of debt being programmed to recognize and institutions were forced to dispose added in the latest round of corporate avoid serious risk, including those of securities to cover their debts financial engineering. Merger and never encountered before.” More and meet calls, buyers for acquisition activity had hit an all-time succinctly, Warren Buffett has said subprime mortgages disappeared record the previous year with about that there are two rules to faster than ice cubes on a hot day. $1.5 trillion of equities disappearing successful investing: from the market due to buyouts. Liquidity disappeared altogether for Mondays seemed to be a favorite day Rule #1: “Don’t lose money.” the more complex securities which to announce deals. Merger Mondays Rule #2: “Don’t forget Rule #1!” became almost impossible to value led us to comment, “What do you due to the securities becoming know, another LBO?” LBO, of course, By investing in HI-quality firms at swamped in FUD (fear, uncertainty stands for leveraged buyout as reasonable valuations, we sought and doubt). As fear overtook greed, substantial debt was generally used to profit from long-term investing a flight to quality ensued with to finance the deals. We recalled while minimizing risk—never investors seeking safety in U.S. how acquired firms often groaned forgetting Buffett’s #1 rule. Treasuries. under huge debt loads with several After two issues discussing debt companies collapsing during the last Meanwhile, fire-sale prices created and other investment risks, the wave of LBO activity in the 1980s. buying opportunities for investors first cracks in our financial system and HI-quality companies with Loading up companies with dubious began to appear due to debt and ample liquidity. During this period, debt didn’t make much sense to us. risky behavior as explained in our we followed Buffett’s advice, “Be The last LBO wave didn’t end on a SEPTEMBER 2007 issue, Be fearful when others are greedy and happy note, and we didn't believe this Fearful When Others Are greedy when others are fearful.” one would either. We acknowledged, Greedy And Greedy When however, that until the credit spigot Others Are Fearful. As housing MARCH 2008 markets remained was turned off, folks will likely keep prices bubbled up beyond any difficult. Our article, Recession? asking, “What do you know, another reasonable measure of Credit Crunch? Not For These LBO?” (Note: Our March 2007 affordability in many markets, Steady Eddies, provided advice warning proved accurate as it came those in the mortgage industry on the best investments for tough before a colossal credit crisis crippled created innovative ways to lend times. We acknowledged that, the global economy.) money. Buyers with questionable unfortunately, recessions and credit

Page 6 Hendershot Investments, 1994-2014 crunches are a normal part of the companies compelling, we The SEPTEMBER 2009 issue business cycle. We believed that it observed that this may indeed brought warning bells in Cash For would take time to unwind the be one of the best times to buy! Clunkers. The previous year a excessive leverage in the financial shocked world watched giant system with further losses likely for The next six months offered financial dominoes topple. In the those who didn’t price risk more challenges for investors to Fall of 2009, after much angst and appropriately. To help minimize risk, keep calm and stay the course. pain, the financial system and we suggested only investing in HI- With the stock market down economy started to stabilize as the quality companies with solid more than 50% following the long road to recovery was paved by financial positions which enable financial crisis, the MARCH massive monetary and fiscal them to not only survive but thrive 2009 issue reminded folks that stimulus. during economic downturns. The Future Has Not Been Cancelled! One of the most popular fiscal While volatile markets created by stimulus programs, “Cash for recession concerns and credit We were in the middle of the Clunkers,” was rolled out to help crunches may be unnerving, worst recession seen in jumpstart the ailing auto industry investors realize that it is during decades. Every major asset after GM and Chrysler filed for these periods that great buying category, including stocks, bankruptcy. Nearly 700,000 shiny opportunities often arise. We bonds, real estate and fuel-efficient vehicles were sold to advised long-term investors, commodities had suffered replace gas-guzzling clunkers. shopping for bargains, that they significant losses resulting in the should get ready to go steady with destruction of over $30 trillion of In anticipation of the economic Eddie. A sample of our steady paper wealth. The stock market recovery, the stock market rallied Eddies included: ADP, PepsiCo, was gripped by fear, panic and strongly. The was led by the Procter & Gamble, TJX and United risk aversion. However, we clunkers–those very financial Technologies. predicted that this, too, shall stocks which contributed to the pass. Like a stretched rubber 2008 Big Crash. We warned that a SEPTEMBER 2008 did not find any band, we expected the stock caution light should flash when silver linings showing through the prices of HI-quality companies investors trade cash for clunkers, gray skies, but it did provide time for would snap back strongly toward especially when the road to some rainy day shopping as the intrinsic value of these recovery was still filled with plenty recognized in our feature article, excellent businesses once a of potholes. We further advised that The Time Of Maximum Pessimism fearful Mr. Market regained his investors riding in junky clunkers Is The Best Time To Buy. The confidence and composure. may soon see their investments credit crisis that started a year stall out or, even worse, sputter earlier with subprime mortgages had We advised folks to keep in mind and die by the side of the road. now spread into all credit sectors that long-term investors reap the and was contributing to a global highest rewards following bear Instead of trading cash for economic slowdown. At the same markets. We had suffered clunkers, we suggested that time, rising energy and food costs through a number of bear investors park their hard-earned heated up inflation. Throw in global markets during the past century dough in attractively valued HI- tensions, rising unemployment and and America’s HI-quality quality companies which offer a a presidential election, which could companies always rebounded, secure ride to long-term profits. and we fully expected them to do result in higher taxes, and it was no As we exited the winter season, wonder that Mr. Market was so again. As Fluor’s MARCH 2010 brought the kind of extremely pessimistic. management reminded us on their earnings conference call, blizzard we like, A Blizzard Of Dividend Increases! The Blizzard However, we suggested that “The future has not been of 2010 will not be soon forgotten investors should keep in mind one of cancelled!” for the folks in the Washington DC the quotes of the legendary global NOTE: As this newsletter was area. During the height of the investor and great philanthropist, Sir hitting mailboxes, the financial storm, all activity came to a halt John Templeton, who said, “Bull crisis bear market was reaching and weak structures suffered roof markets are born on pessimism, the bottom with the DOW at collapses under the weight of too grow on skepticism, mature on 6547 on 3/9/09. As predicted, much snow. After the record optimism and die in euphoria. The the subsequent rally to a DOW snowfall, it was difficult to gain time of maximum pessimism is the near 18,000 has been extremely traction as everyone tried to dig out best time to buy and the time of rewarding to investors who of the mess. Even the Federal maximum optimism is the best time stayed the course. government had to remain closed to sell.” With valuations for HI-quality for four days.

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In a similar fashion, we believed that quantitative easing—dubbed opportunities created by other no one would soon forget the 2007- QE2. We wrote: investors (and computers) dumping 2009 financial meltdown that hit the stocks without regard to the global economy. At the height of the “Our HI-quality companies underlying value of HI-quality credit crescendo, economic activity harnessed their ship-shape businesses came to a halt as business froze. balance sheets, by raising more The Fall of 2012 found another Weak businesses collapsed under than $20 billion of cheap capital major challenge facing the US the weight of too much debt. during the past few months, economy. SEPTEMBER 2012’s Following the storm, the economy thereby stockpiling cash for article, Fiscal Cliff Ahead, Beep! was attempting to gain traction. general corporate purposes, Beep!, detailed the issue. Regarding Many wished the government would rainy day funds, acquisitions, the national debt, potential tax close down once again instead of dividends and share buybacks. increases and the “fiscal cliff,” we threatening higher taxes. While there will always be a few wrote: “Without Congressional squalls when investing in stocks, action, Americans will face one of Despite the many challenges of the our HI-quality companies, the largest tax increases in history storms, HI-quality companies wearing life jackets filled with and massive spending cuts managed well through the turmoil. cash, should provide investors beginning Jan. 1, 2013, which has With strong cash flows and sturdy with smooth sailing over the been dutifully dubbed the fiscal cliff. balance sheets, 14 of our HI-quality long term.” With Congress acting like a bunch companies delivered a blizzard of of Looney Tunes characters, the dividend increases during the In SEPTEMBER 2011, we U.S. economy is threatened with preceding three months with these returned to the theme of keeping falling off the fiscal cliff with a big dividends compounding strongly our eye on the value of our SPLAT, much like Wile E. Coyote over the previous five years, too! companies in our article, When in a Roadrunner cartoon. Mr. Market Hits The Panic Potentially diving off the fiscal cliff, On average, the 14 HI-quality Button, Focus On Fundamentals. The however, is no laughing matter as companies had increased their stock market had suffered a another severe recession would dividend each of the last 28 years substantial decline. Factors undoubtedly ensue. based on confidence in their contributing to the stock market’s financial strength, long-term growth drop included rancorous political The mounting national debt is one opportunities and their durable bickering over raising the U.S. of the biggest challenges facing the competitive advantages. The debt ceiling; S&P’s downgrade United States. While both steadily growing dividends provided of our nation’s AAA credit rating; comprehensive tax reform and a powerful return to long-term European sovereign debt significant spending cuts will be investors. Even better, we expected worries; and fears of another needed to close the growing deficit, these growing dividend income global recession. Following we all know that Congress is as streams to bubble ahead of inflation S&P’s U.S. credit downgrade, reluctant to cut pork from the in the years to come. With steadily the Dow for the first time in 115 budget as Porky Pig is to undergo growing dividends, we believed our years experienced four straight liposuction. Yet not only will pork HI-quality portfolio pantry to be well daily 400-point swings with the need to be pulled, but entitlement stocked to comfortably weather market moving 4% on each of programs will also need to be future blizzards! those days. placed on a diet. In the feature article of our Amid this violent stock market Washington’s inability to deal with DECEMBER 2010 issue, All volatility, it was no wonder a the country’s fiscal problems is Aboard The QE2, we noted that two fearful Mr. Market hit the panic taking a big toll on business and years after the stormiest financial button. However, long-term consumer confidence, hindering crisis since the Great Depression, investors know Mr. Market is economic growth. Other concerns the U.S. economy appeared to be subject to periodic panic attacks. include healthcare reform, which finding its sea legs although We once again stressed rather has everyone asking, “What’s Up, unemployment remained than running for the exits, one is Doc?” Given all these challenges, unacceptably high and whiffs of better rewarded by evaluating many investors are selling their deflation filled the air. As a result, business fundamentals and the stocks and saying, “That’s all folks!” attractive valuations created by the Federal Reserve announced We believe giving up on stocks is a plans to buy an additional $600 the panic. By focusing on fundamentals, successful long- big mistake. We also expect the billion of longer-term Treasury U.S. economy will behave more securities by mid-2011 in a renewed term investors avoid the motion sickness of volatile markets and like the Roadrunner than Wile E. effort to spark economic activity Coyote by making a sharp U-turn through a second round of can take advantage of buying

Page 8 Hendershot Investments, 1994-2014 before heading over the fiscal cliff. Clorox, Fastenal, General hovering near 18,000, about an 8% Before making rash changes to Dynamics, Genuine Parts, 3M, compounded annual return since investment plans, long-term investors Procter & Gamble and T. Rowe our first publication in 1994. The should remain focused on HI-quality Price were now fully valued and S&P 500 index, with dividends business fundamentals. Happy accordingly we trimmed back reinvested, has provided an endings can occur outside of those positions, while technology approximate 10% annual return. cartoons!” (Note: As predicted, the stocks like Apple, Google and Although we have not made the fiscal cliff was averted.) Microsoft now appeared very right call on every investment, we Tax issues continued to plague attractively valued and were are very proud of our overall track investment decisions when If You purchased for the HI portfolio. record, which has significantly Let The Tax Tail Wag The We marveled at how times had outperformed the indices over the Investment Dog, It Just Might changed. However, we observed same 20-year period. Bite!” barked onto the front of the that what had not changed was DECEMBER 2012 issue. that rational investors focused As we embark on our next twenty on valuations will often march to years, Hendershot Investments With the election over, the focus had a different drummer than expects to navigate through turned to the looming fiscal cliff and emotional Mr. Market. inevitable future stormy business the Bush tax cuts that were set to cycles and other unknown expire at the end of the year. Many In the feature article from our challenges and risks by holding to folks, fearful of higher capital gains DECEMBER 2013 issue Dow the investment philosophy and taxes, were not waiting for Congress 16,000, Now What?, we again principles that have served us so to act and were selling stocks before addressed valuations and our well for our first twenty years. year end, which we cautioned could investment philosophy. The be a big mistake. stock market was hitting all-time We remain committed to identifying Rather, we predicted that the likely highs, which had us trimming and purchasing HI-quality stocks at tax compromise would result in the back more stocks than usual as reasonable valuations and holding vast majority of Americans NOT a generous Mr. Market was them for the long term. facing a change in their tax rates, a offering us full value for many of forecast which proved to be correct. our HI-quality firms. We will continue to seek to invest in The lesson learned was that companies with steady growth, investors should be wary of We remained patient and strong free cash flows, solid becoming preoccupied with taxes at disciplined in reinvesting the sale balance sheets with little or no long the expense of their long-term proceeds as most companies we -term debt, highly profitable investment objectives. If you let the followed appeared fairly valued. operations and management teams tax tail wag the investment dog, it In this rapidly rising market, that make intelligent capital just might bite! bargain stocks are as scarce as allocation decisions. Those hen’s teeth. attributes have led to successful With the stock market surging and investment results over the past 20 valuations rising, the MARCH 2013 With the Dow at 16,000, we years, and we believe they will issue again focused on selling. In reiterated that Hendershot continue to serve us well over the Marching To A Different Drummer Investments would continue to next 20 years. Than Mr. Market, we attempted to invest as we had always done— answer the critical question of by focusing on individual determining the right time to sell. companies and not the market. THANK YOU!! We want you to know that we truly Relying on tried and true valuation As our loyal readers would principles, we once again advised value the confidence and trust you expect, we again sang our have placed in us over the last 20 that selling shares optimally occurs familiar refrain: invest in HI- when a stock price approaches or years. We sincerely appreciate quality companies at reasonable that you chose Hendershot moves ahead of the intrinsic value of valuations and hold them for the the business. In illustrating our point, Investments to help serve your long term. However, when investment needs. we revisited Mr. Market’s “irrational reasonable valuations are exuberance” for dot-com companies scarce, we will patiently hold We look forward to many more discussed in our MARCH 2000 cash until attractive values years of working with you and issue and our advice at that time to reappear. pledge to do our very best to help reinvest in undervalued “old you meet your investment goals. economy” stocks. DECEMBER 2014: After twenty We are devoted to helping you Thirteen years later, we found that tumultuous years, the Dow conserve and grow your wealth. those “old economy” stocks like Jones Industrial Average is Thank You!!