Arlington Value Capital presentation for the year ended December 31, 2014.

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Investment Objective

Arlington Value Capital seeks to attract like-minded partners who focus on long-term results with the objective of outperforming the major indices over time.

Investment Philosophy

  • We view stock as ownership in a business.
  • We let volatility work to our advantage.
  • Arlington strives to be conservative, and invest with a margin of safety.
  • We exercise patience and discipline to only invest in exceptional opportunities.

[drizzle]Above all, we think vigilance towards risk is central to solid investment returns.

We view stock as ownership in a business:

  • The over-arching principle of our investment discipline is to approach buying stock as though we were buying the whole business outright and retaining management.
  • Employing an owner’s mentality helps us tune out distracting noise, allowing us to focus on the long-term fundamentals of the business as opposed to the daily gyrations of the share price.

We let volatility work to our advantage:

  • On average, individual stock prices fluctuate more than 75% in a 52-week period.
  • We don’t believe volatility equates to risk.
  • We welcome volatility as volatile markets occasionally offer extraordinary opportunities.

Arlington strives to be conservative and invest with a margin of safety:

  • When analyzing a business, we strive to be conservative and realistic in our assumptions.
  • We are disciplined investors, and purchase stocks only when favorably priced.

We exercise patience and discipline to only invest in exceptional opportunities:

  • Fiercely competitive markets combined with a limited mental aptitude makes it difficult to find attractive investments - where the risk/reward equation is extremely favorable.
  • Because exceptional opportunities are rare, we want to make meaningful investments when such opportunities are identified.

[Speaking about Berkshire Hathaway growing from 10 million to 120 billion over 40 years] “Success wasn’t based on hyperkinetic activity. It was achieved through nondiversification, a hell of a lot of patience, and intensely opportunistic behavior on a few occasions… If you took the top 15 decisions out, you would have a pretty modest record.” - Charlie Munger / Vice Chairman, Berkshire Hathaway

Investment Criteria And Process

Our success depends on exercising patience and discipline to only invest in situations that meet our criteria:

  • Ability to Understand the Business: We focus on businesses we thoroughly understand.
  • Staying Power: Arlington focuses on companies with staying power. We look for long-term durability and low rates of change.
  • Quality Management: We look for honest, intelligent management teams with proven track records.
  • Attractive Price: We only invest when the price is attractive, which provides both a margin of safety and favorable prospective returns.

Arlington Value Capital

Arlington Value Capital - Performance Summary (12/31/2014)

Arlington Value Capital

In July 2008, Arlington Value Capital launched AVM Ranger Fund, LP. AVM Ranger Fund, LP is our primary fund has generated a 37.9% annualized return (before fees) and has outperformed the S&P 500 by approximately 28% per annum since inception.

Arlington Value Capital

Prior to AVM Ranger LP, Arlington Value Management LLC (AVM) was our primary fund. From mid 2008 through mid 2011, AVM and AVM Ranger were managed side by side. After Q2 2011, AVM LLC was merged into AVM Ranger LP. The above chart shows the combined returns since inception.

Arlington Value Capital

The two tables above demonstrate how Arlington has stacked up against the S&P 500 and the top 10 performing funds of the approximately 5,000 and 3,000 US equity funds tracked by Morningstar over the approximately 6.5 years since AVM Ranger Fund’s inception and the 11.5 year lifespan of Arlington Value Management LLC respectively. The average return for all funds is likely below the returns for the index as it is widely noted that most funds underperform the index over time. Performance for all funds is gross of management fees.

Arlington Value Management LLC was merged into AVM Ranger LP in Q3 2011. The 11.5-year data represents Arlington Value Management LLC’s return from its inception in December of 1999 through June 2011.

Batting Average:

“I was a good investor myself, but I couldn’t do what Warren and Charlie do so well – virtually never have any losers.” – Otis Booth, major Berkshire Hathaway shareholder

Arlington Value Capital

  • A stubborn adherence to our investment principles results in a high batting average.
  • A high batting average is the key driver of strong long-term performance.

The above graph displays the 3-year performance of each stock in which Arlington committed more than 3% of its capital relative to the 3-year performance of the S&P 500 over the first eight years of the fund. For perspective, the accompanying graph displays the 3-year performance of each company in the S&P 500 compared to the 3-year performance of the index average. Arlington may have held the investment for less or more than three years, but we feel a 3-year period accurately demonstrates the success of the initial investment decision.

Vigilance Towards Risk

Above all, we think vigilance towards risk is central to solid investment returns.

“It is very easy to generate performance by taking on more risk. And so what you need to do is compensate for risk-adjusted performance... and that is where all the bodies are buried.” – Ragharum G. Rajan, IMF Chief Economist (2003 - 2007)

A Consistent Vigilance Toward Risk:

From Arlington Value Capital’s 2001 Annual Letter:

“. . . a big portion of our assets are invested in companies that should thrive in a period of declining equity markets and tight capital markets in general.”

From Arlington Value Capital’s 2003 Annual Letter:

“Junk bond spreads over treasuries have narrowed sharply. It seems as though institutional investors are focusing solely on returns and forgetting about risk. . . our top three holdings are defensively positioned.”

From Arlington Value Capital’s 2004 Annual Letter:

“Going into 2005 we continue to have the portfolio positioned defensively. . . Given the high prices and significant risks in the market, we believe our positioning is prudent for the long term.”

From Arlington Value Capital’s 2005 Annual Letter:

“The current market environment reminds me of the crocodile pond my brother described to me after returning home from Australia: What looks calm and inviting to jump into is fraught with potential danger just below the surface. I think it’s a mistake to equate the low volatility in the market to a low risk environment in which to invest.”

From Arlington Value Capital’s 2006 Annual Letter:

“Wall Street tends to overweight, and extrapolate the most recent past performance - which has been favorable and without any serious gyrations or shocks. As a result, financial markets are pricing in tranquility as far as the eye can see.

. . . Many take comfort in the derivatives market to hedge risk. The number and amount of derivative products have proliferated at an incredible rate over the past few years. In normal times these innovations help to spread out risk. However, it’s times of unusual shocks and distress when one needs these products the most. Unfortunately, this is likely to be the time when these products add to the instability as large-scale liquidations take place between a small number of

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