MANAGEMENT COMMENTARY January 31, 2015 FIRM UPDATE During the 4th quarter of 2014 and into the beginning of calendar year 2015, JRW Financial enjoyed a renaissance of sorts. My focus for the firm has crystallized, and my vision of our investment pursuits is clearer than ever. We are dedicated to being fundamental, value-oriented, businesslike investors. We focus on risk management and protection of capital above all else and only then do we look for compounding returns over long-term investment periods. The spirit of our investment philosophy is as alive as ever, and we enter 2015 reinvigorated by the pursuit of finding wonderful businesses trading at reasonable and attractive prices. I’m a believer in learning (and borrowing liberally) from the ideas of contemporaries and forebears. On our new firm logo there is the Celtic symbol for eternity, and a new motto: sub specie aeternitatis. Aeternitas was the ancient Roman representation of eternity. In one of the great investment letters published quarterly by Christopher Begg at East Coast Asset Management, Chris references that Benjamin Graham, the father of value investing, would open his classes at Columbia Business School by writing the words sub specie aeternitatis on the board. The words, loosely translated, mean “with a view towards eternity,” and are taken from the Dutch philosopher Baruch Spinoza. “With a view towards eternity” sums up perfectly our investment outlook and philosophy. Conceptually, I’ve long considered long-term, value investing to be the most superior approach to market participation that exists, and most suitable to my nature and for the goals and pursuits of our firm. For periods of time, however, I’ve dabbled in and pursued other forms of market participation, including “speculation” and “short-termism.” I believe strongly in learning other approaches as it offers an excellent frame of reference for the focus of one’s specialization. Having pursued other forms of market participation, I’ve cemented my own status as a dedicated fundamental, value-oriented, businesslike investor. The greatest investment successes for me and for our firm have come when we focus on the simple idea of investing in great businesses at wonderful prices. This is the approach of Warren Buffett, one of the truly great investors of all-time. I believe following the approach of those who have had great success makes complete sense. While the idea of investing in wonderful businesses at attractive prices is simple, the pursuit is not easy. The concepts of fundamental, value-oriented, businesslike investing are timeless, and we are rededicated to our efforts. Therefore, I have rebranded JRW Financial with a renewed purpose and focus on investing in great businesses JRW Financial LLC | 162 South Easton Road Glenside, PA 19038 | 267-217-3025 | www.jrwfinancial.com purchased at attractive prices. We are in it for the long-term, focusing on growing our firm and protecting and growing our partners’ wealth for years and decades to come. Investing is my passion and a pursuit to which I dedicate myself with great excitement and fascination. When I look towards the future, I do so with confidence, hope, and optimism. AETERNITAS FUND In the spirit of our firm’s rebranding, we have implemented one model composite portfolio for the firm, what we refer to as the Aeternitas Fund. Since we are a separate account manager at this time, we may or may not invest in particular securities for all clients, and specific investments are mailed and addressed under separate cover. However, the aggregate Aeternitas Fund represents our aggregate view on positions taken for the firm. This model portfolio is tracked by the firm and any future commentary related to positions will reference the Aeternitas Fund, and does not necessarily represent positions taken for any particular clients or partners. Future commentary may reference positions taken, performance of positions, and may include many of the investment theses we use to take market positions. All references will be based on the aggregate Aeternitas Fund and may not reflect precisely any positions taken in individual accounts. MARKET COMMENTARY After significant gains in 2013, the market followed up with above-average gains in 2014. An interesting note from John Osterweis of Osterweis Capital Management, found online in Barron’s, indicates that the top 20 stocks in the S&P 500 accounted for 41% of the index’s performance in the first half of 2014, and 57% in the second half of 2014. While the market in aggregate provided solid returns over 2014, it is clear that breadth was limited. This may be why most active investment managers failed to outperform during the year. We continue to believe that active investment management can and will outperform over long-term investment time horizons. Market volatility is natural, particularly in an environment following a sustained run-up in broad market index prices. Many geopolitical and macroeconomic events have contributed to recent volatility, including Greece, the Euro, falling oil prices, Russia, and continued threats from terrorists worldwide. While we pay attention to geopolitical and macroeconomic developments and the direct risks they pose, we look always for second-order effects as well. In the case of energy-related businesses, the sharp decline in oil prices can impact business operations negatively. However, declining oil prices lead to lower prices for consumers at the gas pump. In turn, this may lead to more discretionary income for consumers to spend on luxury or other consumer items, impacting positively the revenues and free cash flows of consumer businesses. Broadly speaking, we do not let geopolitical or macroeconomic issues influence whether or not we are invested at any particular time, but we do consider both the direct effects and any ancillary or second-order effects these issues have. Sometimes geopolitical or macroeconomic events negatively affect entire industries or sectors without regard for the underlying businesses. We believe this is happening in the energy sector right now. The market has not been discerning it its treatment of most energy-related businesses due to the continued sharp decline in the price of oil. When the market sells off every company 2 having any remote relationship to the price of oil, we take the volatility as an opportunity to familiarize ourselves with the best of breed companies within the sector. Inevitably we will come across companies whose price has declined unjustly, and whose operations will be impacted much less severely than other companies. Those are the businesses in which we will look to invest or to which we will look to add if we already own shares during this time of peak volatility. No one knows when the price of oil will rebound, and no one knows to what point the price may return. However, we know that there will be wonderful businesses that remain wonderful during this time, and a broad-based sector selloff will discount these wonderful businesses. Volatility brings opportunity. We are ready to strike. Volatility engages the human fight or flight response. Loss aversion is a perfectly natural psychological trait and is triggered by the sight of falling market prices. While we cannot turn off our innate emotional responses, we can focus on controlling how we respond. Warren Buffett quipped famously that it is better to be fearful when others are greedy and greedy when others are fearful. When volatility and falling market prices evoke fear in the majority of market participants, we force ourselves to overcome our natural instincts to run away from the market. Instead, we double-down on our research related to specific ideas that may get caught up in the market’s fear. If volatility causes a greater disconnect between price and per share business value of attractive companies, we take notice and make purchases. Helpful to our cause of overcoming innate psychological reactions is our dedication to our fundamental value discipline. In truth, we enter each investment with the expectation that we will lose money over the short-term after our purchase. This expectation forces us to be certain the investments we make are both high-quality and “priced for sale.” When we are reasonably certain as to the quality and value we seek in our holdings, we can remain calm and rational in the face of falling share prices. The market is full of noise in the short-term. Noise brings volatility and volatility leads to opportunity. Our bottoms up approach to choosing wonderful businesses and purchasing ownership interests when the market offers prices at reasonable and attractive discounts to our estimates of per share business value allows us to be opportunistic. We take a long-term “view towards eternity” in our investing. We focus on understanding businesses and calculating per share business value, not market movements and daily fluctuations. As these fluctuations move market prices further and further away from our estimates of per share business value, we are keen to buy new positions and add to current holdings. Provided that we have a fundamental thesis for owning the business, and that this thesis remains intact, we strike while the iron is hot. In closing, it’s good to be back. Investing is a truly fascinating pursuit. We seek out knowledge and learning in every company we analyze, and we look towards the future to protect and compound wealth for the long-term. Joseph R. Weidenburner, JD President & CIO JRW Financial LLC 3