Twenty Year Anniversary Special Edition!

www.hendershotinvestments.com www.hendershotinvestments.com Page 1 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 long-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 valuation sic value. Following this model, outlined our investment philosophy measure that deserved a hairy we identified several other stocks 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 investors 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 stock 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 companies 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 dividends 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.’ “ MARCH 1998 featured another HI ***** the balloon to cover up their deficiencies. However, most of the investment principle in the article, As the dot-com bubble began to Cash-Rich And Debt-Free Provides em-bar-assed emperors just burst, we featured articles streaked away, and their tulip-filled Opportunity where we identified discussing the valuation and some of our favorite investments, empires disappeared almost as price of these high-flyers. Our quickly...never to be seen again. companies that are cash-rich and 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 shareholder 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 public offering, 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 common stock 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 company, 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.

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