As of December 31, 2008

Last updated December 19, 2008. No transactions since then.

2008 Performance
As I explained in Letter 3, when I began direct management of investments for about 35 people in 1999, I committed the project to God and asked Him to reveal to me to whom I should listen. At the same time I told my investors that if we had one down year, I would discontinue managing money for them. For the eight year period ending December 31, 2007, we had no down years, and averaged high double digit returns per year for that period.

Then 2008 arrived. At the end of November, my portfolio was down 4.5% year-to-date. By December 19, it had fallen to a loss of about 9% year-to-date. At that point I would have estimated the probability of 2008 being an up year at about one in fifty. But in the last few days of the year, the portfolio experienced a strong snap-back. Almost everything I held went up, and I finished the month of December up 5.1%. For the year 2008, the portfolio actually finished up .35% (that’s about one-third of 1%). Of course, it wouldn’t have mattered if 2008 had been a down year, because I had already discontinued direct investment management at the end of 2007 anyway. I have always believed God has a sense of humor. I can’t prove it of course, but He may have engineered enough gain the last few days of the year to stretch my string of up years to nine. Whatever the case, all I can say is praise Him! 

The Permanent Portfolio Fund (PRPFX)
PRPFX closed 12-31-07 at 36.04, and closed 12-31-08 at 32.71, a decline of $3.33 per share. Adding back the $.29 cash dividend it paid December 2, 2008, its actual decline for the year was $3.04 per share, a loss of 8.4% for 2008. None of us had any idea 2008 would be the kind of year which occurs probably twice a century, but it was. I cannot tell you how thankful I am that all my widows and most of my lower income investors had most or all of their money in PRPFX. It performed its safe haven role admirably in 2008.

Presently, I do not hold any PRPFX, but my portfolio is structured very similar to it. Had I not been fortunate to have about 20% of my portfolio in natural gas producing properties, which increased in value with the addition of several successful wells during 2008, my results for the year would have been similar to the performance of PRPFX. Those investors who had little or no PRPFX, but who followed my allocation change in March, 2008 (Letter 19), would have gotten similar results. In a year in which most stock averages and commodities were down 40% to 60%, our loss was held at 10% or less. God is not obligated to prosper us financially. He has promised to do only what is in our best interest. But I consider a loss of less than 10% in 2008 a big success. God gets all the glory and praise for that.

Here is how my portfolio looks today.

As you can see, stocks have increased from 12.7% to 14.2% since December 19. Some of this is new investment, the rest increase in market value. When SSRI (my favorite silver mining stock) fell all the way from a high of 48, 14 months ago, to 5 in October, it became a classic panic selling opportunity, losing all relationship to value. I added at 8 and again at 6 (increasing my number of shares by more than 50%). This new investment has almost tripled already! I intend to slowly accumulate more stocks up to my maximum of 20%, hoping to do so on pull backs, but if not, dollar cost averaging, probably next adding to GDX and XLE.

I’m very happy with my gold and silver allocations, and expect silver to outperform gold over the next 3 to 5 years for reasons explained in past letters. Gold outperformed just about everything in 2008, and actually rose 6.8% for the year. This was its eighth up-year in a row (a fact I would guess not one in 1000 individuals is even aware of). Silver fell 23.3% for the year, which negatively impacted my performance. However, these numbers are based on the futures market price which is substantially below the actual market value in the cash markets as explained in past letters. If I had valued my silver at its cash market price, it would have been about even for the year. This will correct at some time in the future. Right now, the best buys appear to be silver, the agricultural commodities (DAG, DBA and RJA), and oil (USO). I plan to accumulate more RJA and USO.

Cash has dropped from 33.6% to 31.3% since the last report, for three reasons: living expenses, giving and new investments. We live and give out of our portfolio.