Cook & Bynum quarterly portfolio managers’ update.

Cook & Bynum initiated their first new equity position in over two years during the second quarter.  A decline in the price of Coca-Cola Embonor afforded us an opportunity to buy a stake.  Embonor bottles, markets, and distributes The Coca-Cola Company (NYSE:KO) products in most parts of Chile outside of Santiago and all across Bolivia.  We first met with the company in Santiago in 2009 and have followed its progress closely since.  As part of his trip to Chile in March of this year, Richard sat down again with Embonor’s management and conducted market visits both inside and outside of the company’s territory in Chile.  He was also able to meet with a key competitor as well as the other Chilean Coke bottler.  Our research suggests that Embonor’s growth prospects are excellent, particularly in Bolivia where per capita consumption is very low.  Broader interest in the company among the financial community appears to be limited because of its smaller size, the relative illiquidity of its shares, and its decision to make some of its financials available only in Spanish.  The tendency for the share prices of less-followed companies to diverge more widely from their intrinsic values helped provide this opportunity in Embonor, and may allow us to add to the Fund’s stake over time.  We hope to be long-term shareholders.

Cook & Bynum Q2 Letter: First New Equity Position In Two Years

Cook & Bynu’s time with Wise Foods

In June, we spent time with the management at Wise Foods, which Arca Continental purchased in late 2012.  We encourage you to try all the various snacks made by Wise when you see them in your grocery store.  Arca’s share price has appreciated over 40% since we acquired additional shares in March.  As we wrote last quarter, we knew we would regret not being able to buy more when it traded down on fears around the Mexican excise tax on sugar-sweetened soft drinks and snacks.  We remain grateful for the outstanding effort of all the fine people at Arca.

Cook & Bynum researching companies in Indonesia and Australia

We are looking diligently for other new ideas.  Richard spent time this quarter in both Indonesia and Australia researching companies.  Several of them have outstanding businesses with defined moats, but our current assessment of their prospects prevents us from purchasing these stocks at current prices.  We are hopeful that one or more of these companies will become Fund holdings at some point in the future.

Cook & Bynum prioritizing return of capital

We continue to be patient and to prioritize the return of capital over the return on capital.  These are ever more challenging times for investors,  as the current relentless upward march of equity prices is by definition both increasing the risk of capital loss and decreasing the expected returns for investors.  We will remain vigilant about the prices that we are willing to pay, continue to search for attractive opportunities like Embonor, and prepare for the inevitable time when rates of return become attractive again.

We invest substantially all of our liquid net worth alongside our investors – we expect to earn the same returns as they do.  We have deliberately designed this Fund’s structure and our rule of investing only in our funds to align, as closely as possible, our incentives with our investors’ goals.  Please do not hesitate to let us know how we can be of service.

Sincerely,

Richard Dave