"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die in euphoria. The time of maximum pessimism is the best time to buy, and time of maximum optimism is the best time to sell." - Sir John Templeton

Sir John Templeton was one of the most astute investors who pioneered international investing and built an enviable track record over 50 years.

We have fielded a number of calls over the last few weeks and are sympathetic to our investors' concerns about their investments. I think the above quotation goes a long way to describing how we try and do our job of investing. For quite a long time we came under a lot of pressure for our perceived lack of performance. It was a very tough time for us. Fortunately, we stuck to our investment process and invested in ideas that were not popular at the time and these investments have cushioned us in these difficult times. More important, we now have cash to invest to the tune of 20% of the fund.

It is going to become very unpopular to invest in the US and emerging markets. We are very excited about the opportunities that are ahead of us and have the names we want to invest in - our patience will be rewarded at very attractive prices.

Finally, we understand the companies; they have strong balance sheets, terrific management and products that we trust.

Everywhere one looks there is growing pessimism in all aspects of our lives. Compare this to the beginning of 2007 when it was the reverse and those riding the "super tube" were somewhat dismissive to the warnings of those on the shore.

As a fund manager I may have stuck out like a bear with a sore thumb when I warned (perhaps seemingly preemptively) of the high potential of negative events unfolding. In many respects, fund management is a waiting game demanding great patience and at Aylett & Co we have been in a state of anticipation of negative news for some time now. As I have often said, pessimism brings with it wonderful buying opportunities and it is precisely during negative times that the astute investor circles the market waiting to invest at attractive levels. We are somewhat bewildered why investors are now withdrawing their money and investing in money market funds. So far, we have been fortunate in that we have not experienced major outflows, but the market tells us that many funds are facing redemptions and this behaviour may well explain price drops of certain shares.

Investors trying to time the market are more likely to miss out on the rebound. Research conducted by Laszlo Birinyi (president of Birinyi Associates, a financial consulting firm) and Jack Bogle (founder and retired CEO of The Vanguard Group) both came to similar conclusions on being out of the market. For example over a period of 35 years, $1 invested in the S&P would have grown to $11.71. Subtract the five best trading days per annum and your dollar would be worth 15 cents!

Currently, our investment behaviour is well described by that lovely Greek word "ataraxia"- the state of not being bothered by things that bother other people. To quote another portfolio manager, Piet Viljoen: "As investors, our team is 'inversely emotional' (greedy when others are fearful and fearful when others are greedy) and we cannot wait for bonus time to invest more of our own money into our funds. There is simply nothing to beat buying at a discount".

The fund has been in existence for two and half years, and while many of our investors have been invested for just over two years, we have delivered an annualised compound return of about 15%. If we continue at this rate, we will achieve our goal of doubling our money every five years.

What have we done well? Examining the last two and a half years, a few things come to mind:
· Doing unpopular things in investing is lonely, but over the long term it is not a bad start to successful investing (Japan and large cap USA);
· Being patient is also very hard when every other asset class around that you do not own is going up and your investments are not (We did not own Europe);
· Some of your best investments are made during periods of poor relative performance (Redwood Trust);
· When mistakes are made, decisive sells can save you a lot of money (Washington Mutual and Telkom); and
· When staff invests large sums of their personal money into the fund, good things are sure to follow (last quarter was very good).

The rand has been a major help to our performance. However, this will not continue forever. Our hope is that the assets we have purchased will now take over, and help us achieve our goal of doubling our money.

2007 was a disappointing year for the fund. Much of the turmoil experienced over the last six months was expected by your fund manager and in anticipation we exposed the fund to out of favour regions, namely Japan and the USA.

Our investment case for Japan was simply that the YEN was undervalued and that the undemanding valuation of Japanese equities would protect us when the inevitable sell off occurred. In the first instance we were right however it was not enough to protect the fund from the sell off in Japanese equities to make it the worst performing developed market. These very same equities now trade at a 50% discount to Net Asset Value and where dividend yields are now higher than the Japanese long bond. In the words of an experienced Japanese watcher "an event that has previously proved short lived and led to sharp rallies."

Our investments in the USA such as Berkshire, Coke, and Cisco to name a few performed well but were not enough to offset the weaker dollar and a small exposure to poor performers such as Washington Mutual, Marsh and Home Depot.

As always our preferred method of communicating with our unit holders is via an annual letter which outlines in a detailed fashion of how their capital was employed during the year. Keep an eye out for our 2nd letter which should be out by mid February.