Business Owner TGV vs.

the DAX

Annual % Change Annual % Change

in Business Owner in the DAX Relative Results
Year (1) (2) (1-2)
2008 (3 months) -13.4% -17.5% 4.1%
2009 31.1% 23.8% 7.3%
2010 27.0% 16.1% 10.9%
2011 6.5% -14.7% 21.2%
2012 18.4% 29.1% -10.7%
2012 31.9% 25.5% 6.4%
2014 YTD 13.7% 2.9% 10.8%
Compounded Annual Gain 2008 - 2014 YTD 19.1% 9.5% 9.6%
Overall Gain Sep 2008 – 2014 YTD 172.7% 68.6% 104.1%

Free ski passes

Dear Co-Investor,

The NAV of Business Owner was EUR 272.74 as of 30 June 2014. The increase in NAV
was 13.7% since the start of the year and 172.7% since inception on 30 September
2008. The Dax was up 2.9% and 68.6% respectively.

How did our companies fare in 2013?

The best way to track the development of the fund is not through a six month change in
the share price (which is random), but in the development of the earnings of the key
holdings. My aim in this letter is to bring you up to speed on them. I will then explain
how to get a free ski pass – the proverbial 100 Dollar bill hidden in the letter to test who
has been reading it!

Here is a table showing the earnings development of all companies as of year-end in

order of importance to the fund:

Growth
2013 vs.
Business Owner Holdings 2012 Net Income in local currencies
2013 2012 2011 2010 2009
Grenkeleasing AG 11% 47 43 39 28 25
Novo Nordisk A/S 18% 25,184 21,423 17,097 14,403 10,768
Google, Inc . 13% 12,214 10,788 9,737 8,505 6,681
BMW AG (Pref.) 4% 5,340 5,111 4,881 3,227 204
Berkshire Hathaway (Book Value) 18% 134,973 114,214 99,860 95,453 84,487
Baidu, Inc . 1% 10,518,966 10,456,028 6,638,637 3,525,168 1,485,104
Bechtle AG 12% 63 57 63 46 34
Sto AG 5% 69 65 70 58 55
Tonnellerie Franç ois Frères S.A. 6% 24 23 16 14 15
Zehnder AG -32% 18 27 41 38 33
BETT AG 15% 11 9 15 12 6
Source: Company annual reports. Some figures are adjusted to improve comparability.

I will discuss the five largest holdings at the end of 2013 which were in the fund at the
end of 2012: Grenkeleasing, Google, BMW, Berkshire Hathaway, and Baidu. If I were to
exclude the restriction that the companies have been in the fund for the whole year, the
only change would be Novo Nordisk for Baidu. Collectively, the five companies accounted
for 58.3% of the fund. If I included Novo, which I discussed a length in my last letter,
the amount would go up to 74.4%, so I think this pretty much covers the waterfront.

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Grenkeleasing grows and builds out its international network

Grenke, a provider of small ticket IT leasing, continues to go from strength to strength.

Its new business, i.e. the sum of new leasing contracts, totalled EUR 1.2 bn in 2013, up
16% from the prior year. As in previous years, a growing share of its business is
international and it continues to provide access to funding to small businesses in some of
the most capital starved regions in Europe.

As in previous years, Grenke prefers to spend part of its increased revenue in building
out its network in existing countries as well as in new ones. After stepping outside
Europe for the first time in 2012 by adding Brazil, in 2013 it added Canada and Dubai.
Furthermore, it added new offices in Madrid, Cluj-Napoca (Romania), Lugano, Rennes,
Treviso, Antwerp, Graz, Glasgow, Geneva, Rio (Franchisee), as well as adding factoring
to the UK. It is going global.

As a result of these investments, earnings growth lagged growth in new business at

10.6% whereby this is a more than respectable level. The natural operating leverage in
this business will come through when its investment in expanding its network tails off.
Perhaps this year could be the year…

For a number of years, Grenke has been growing faster than its ability to generate
capital to fund it. As a result, it undertook a small capital increase in 2013, which we
enthusiastically supported. A slight disappointment to me is that the company continues
to pay a small, though not immaterial, dividend.

Let me be clear that I have nothing against dividends. Most companies do not have
sufficient reinvestment opportunities and I generally find myself in the role of asking for
more not less (ask Bechtle!). However, where companies have more opportunities than
capital, I would much rather see 100% earnings retention. Given the roughly 30%
withholding tax on dividends in Germany, it is particularly frustrating to pay a EURO of
capital into a company and then have 70 cents handed back a few months later.

As bad as this sounds, it gets worse. As Grenke trades at more than 2x its book value,
that same EURO which was returned to us as 70 cents would otherwise have been
turned into over 2 EUROs of market value.

The Company listened to mine and other shareholders’ concerns and came up with a
rather innovative dividend proposal this year. It became the second company in
Germany after Deutsche Telekom to offer shareholders the choice between a stock and
cash dividend. This enables the company to retain a greater part of its earnings (good),
but means even shareholders such as us who took 100% stock continue to pay
withholding tax (bad). In fact, in an extreme situation where everyone opted for stock,
the company would effectively be making a taxable stock split (very bad).

I appreciate the Company’s efforts to keep everybody happy including those who like to
receive a dividend, but I continue to believe it would be better simply retaining its
earnings whilst it has so much opportunity. If this alienates financially illiterate
shareholders, so be it.

Google is a force of nature

Google grew its revenues by 20.6% in 2013 (excluding Motorola). This really is an
astonishing rate for any company, especially one of the largest in the World. There are
very few companies of any size growing that fast sustainably.

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The casual observer probably puts Google’s growth down to Search and this is of course
an important part of its success equation. However, what astonishes me is the number
of big, important bets Google makes and the frequency with which they come off. This
point was brought home to me when I read through a Morningstar report on the
Company dated January 2010 (it is available as a free sample under:
http://corporate.morningstar.com/US/documents/SampleReports/INS_EQR_Institutional
SampleReport_GoogleUS.pdf).

The analyst applauded Google dominance in Search, acknowledged investments in

YouTube, the Chrome browser and Android, though with a certain scepticism, and
concluded the stock was worth US$ 550, approximately one half today’s share price
(split-adjusted). There is nothing wrong with the analysis and would have been no
different to mine at the time, but in giving little credit to immature products such as
YouTube and yet to be discovered ones (the “unknown unknowns”) such as app store
sales, he ended up massively underestimating the value of the Company. YouTube may
well be worth today a good part of Google’s then enterprise value.

One big bet that did not come off was entry into the smart phone production business
through the purchase of Motorola. Google sold the rump of the business to Lenovo in
January and kept most of the patent portfolio. Depending upon your valuation of the
patent portfolio, the entire transaction was a wash or at the very least scarcely
meaningful for a company of Google’s size. In any case, it goes without saying that if
you are going to have successes, there are bound to be failures from time to time.

Google’s after tax earnings were up 13.2% excluding the gain on sale of part of
Motorola. This is slightly lower than revenue growth reflecting Google’s ongoing research
in products that pass the “toothbrush test” – have the potential to be used by everyone
every day. In Google’s case, I am more excited than fearful of the “unknown unknowns”.

BMW continues to grow at a 20% clip in China

BMW sold 1’963’798 BMW, MINI and Rolls-Royce brand vehicles in 2013, 6.4% more
than the year before. The 2 m mark will fall this year. China remains the stand-out
market with 19.7% growth. Growth in the Americas was also strong at 9.0%. Only
Europe remains the laggard (-0.7%). Financial Services continues to be a strong growth
driver with 9.7% more contracts with retail customers in 2013.

Adjusted for currencies, revenues were up 1.9%. The main reason for the delta to unit
growth is cars sold through its Chinese JV (which are not in its consolidated revenues).
In my view, the unit growth, gives a better picture of the health of the business.

After tax earnings grew by 4.5%, slightly less than revenues. The Group continues to
invest heavily as part of its “Future One” project. An important milestone was the debut
in July 2013 of the i3, its first fully electric car. This surpassed the most optimistic
expectations.

BMW is the slowest growing of our top 5, though it is by no means a slouch. The offset is
that it pays by far the highest dividend at EUR 2.62 or 6% at cost. Better still, I
anticipate a sharp increase in the payout in the coming years.

Berkshire’s snowball gathers pace

The change in Berkshire’s book value – what Buffett describes as a “rough tracking
indicator” of the change in intrinsic value - was 18.2% in 2013. Excluding some
meaningless accounting charges, the increase would have been higher still.

3
There were two major new additions to the Berkshire stable in 2013: Heinz, maker of
the eponymous ketchup and NV Energy, an electricity utility. These will both add
substantially to the Group’s earnings power. Barring a calamity, 2014 will see another
solid gain in intrinsic value.

Baidu’s growth rate accelerates

Baidu’s revenue grew an astonishing 43% in 2013, most of which was organic. In
essence, Baidu has been able to add considerable revenues from smart phone users,
whilst continuing to grow revenues from PC search, in particular by improving the PC
search experience (and hence cost per click). It is ironic that the emergence of smart
phones – the key fear gripping markets at the time we bought our stake – was in fact
not only neutral for the company but actually a huge source of incremental revenue.

Earnings were effectively flat on the year despite the unexpectedly strong revenue
growth. The company decided to invest in securing its position in the mobile world, in
particular through paying operators to pre-install its various apps on new smart phones.
I wholeheartedly support these investments. The opportunity from being the dominant
search platform is so huge – as we know from Google – that it would be madness to put
this at risk through nickel and diming on advertising spend.

At 35%, operating margins remain more than healthy. The norm for technology
companies in investment mode is operating losses. The operating leverage in Search is
so great – there is almost no incremental cost for an additional search – that it is almost
impossible to envisage a long-term scenario where rising revenues do not go hand-in-
hand with rising margins, provided it defends its competitive position. A few years of flat
earnings is a small price to pay to achieve that.

Of all our companies, I believe Baidu has the strongest potential to increase its earnings
power (and hence its value) the fastest in the coming years. It of course also has the
highest risk given the governance situation in China and the fast pace of change there.

Is Berkshire fair game for an active fund?

One question I sometimes hear from investors is whether it is legitimate for an actively
managed fund to invest in Berkshire. “Cannot an investor simply invest directly and save
active management fees?” It is obvious to a non-expert that Berkshire contains an
above-average set of businesses, that Buffett is an honest guy and the stock is pretty
cheap – Buffett has stated so himself on several occasions in recent years.

My response is that Berkshire is a great investment, period. Anyone who decides to

throw all their chips in with Buffett rather than take the lottery of finding the active fund
manager who actually beats the market has my whole-hearted support.

I would nonetheless advance two counter-arguments. First, I have absolutely nothing

against “obvious” investments. In fact, that an investment is obvious is just about the
highest compliment you can pay me. Passing on an investment because it does not offer
you the opportunity to dazzle your investors with your intellectual brilliance is probably
the dumbest reason I can think of not to buy something.

Second, it is clear that six years into a bull market, there may one day be better buying
opportunities than we are seeing today. One wants to keep some power dry. This has
historically meant holding cash, but the problem with cash is its enormous opportunity
cost given interest rates of effectively zero.

4
Berkshire in my view offers a good compromise. It is likely to compound at a low double
digit rate p.a., it is highly liquid, and there is a good chance that in a stock market crash
it falls less precipitously than the market (though this is by no means guaranteed). If
there are at some point compelling opportunities elsewhere, I expect our stake in
Berkshire to be a reliable source of funds and I will not hesitate to use them.

Free Ski Passes

Over the last couple of years, I have accumulated shares in Bergbahnen Engelberg-
Trübsee-Titlis AG („BETT AG“), a ski resort operator in Engelberg, near Lucerne.

In addition to paying a cash dividend, the Company gives its shareholders free one-day
ski passes according to the formula, one pass per 61-300 shares and an additional pass
for every 300 shares beyond 301 shares up to 15’000 shares. The upshot of this is that
we are now the proud owners of 40 one day passes which are valid until 25 May 2015.

If you would like a pass, please send me a brief email with the address to send it to.
There should be just enough to go round, assuming not everyone takes up their
allocation.

Shame on you!

Now, I know what you are thinking… “Rob only bought shares in the ski lift company to
get hold of the free lift passes.” Shame on you!

Actually, the thought is not entirely implausible. Ski lift companies are generally awful
businesses. There are nearly 100 listed ski lift operators in Switzerland and virtually all
of them are loss-making and heavily indebted. The reason is obvious. They are of critical
importance to tourism, upon which their local economies depend. Probably correctly,
they are kept alive (and invested in!) even though many have little hope of making
money. The result is chronic overcapacity and permanently low returns on capital.

It is no coincidence that ski lifts companies are generally thought of as “Liebhaberaktien”

– meaning literally “lover’s” or “fan’s” shares - the implication being that you own the
shares for emotional rather than financial reasons.

So why on earth are we invested in BETT AG?

When I buy a stake in a company, I am looking for four and only four characteristics: a)
a business which will be around and flourishing 10 or more years from now; b) a
sustainable competitive advantage (“moat”); c) a management which is talented and
honest; and d) an attractive price.

The cable railway business is about as durable a business as you can find. The first cable
railway opened in Engelberg in 1913 - it celebrated its one hundred year anniversary last
year. Over the course of its history, it has survived two world wars and various other
crises including the EURO crisis (more on that later). Incidentally, the first mountain
railway, the Rigibahn, was opened in 1871 and is also still in operation today.

Given the disastrous economics of ski lift companies, the more pressing question relates
to competitive advantage.

What makes BETT superior to nearly every other cable railway?

Above all, BETT has a wonderful location. The town of Engelberg is about 20 minutes
drive from the A2, the main road running through Switzerland from Italy to the South,

5
and France and Germany to the North. It is about 35 minutes from Lucerne and 1 hr
from Zurich. It is the closest “larger” ski resort to the Western side of Germany.

The significance of this location is twofold.

First, Engelberg’s proximity to the A2 makes it popular with Asian tourists taking a coach
tour through Europe. The “classic” European tour involves landing in Rome, taking a
coach to Venice, then Milan, making a one day stopover in Switzerland to buy a watch
and go up a mountain, and finishing up in Paris – all in the space of one week. It, as well
as the Jungfrau, are the only ice-capped mountains which lie directly on the route
between Milan and Paris. Alternatives are at least one hour further driving time away.

Second, its proximity to Zurich and Lucerne makes it popular with day and weekend
skiers from these agglomerations, as well as from Germany. Alternatives in Graubünden
are an additional 30 minutes drive from Zurich (which equals 1 hour round trip time).

Where is the competitive advantage?

I would argue BETT’s competitive advantage is twofold. First and foremost, it has an
enormous cost advantage over other ski lift operators. Thanks to the Asian tourists, it
has a strong business in the summer and, to a lesser extent, the spring and autumn. As
such, it has good capacity utilization almost all year round. In fact, it is the only ski
resort, to my knowledge, that sells more tickets in the summer than in the winter.

Clearly, you are in a wonderful position if you can run your “factory” all year round
whereas competitors only run from mid-December to mid-March. Better still, costs are
far lower in the summer as there is no need to run snow canons, prepare pistes, etc.

Second, its proximity both for skiers in the Zurich/Lucerne region and for tourists
travelling through Switzerland gives it a certain degree of pricing power. All other things
being equal, nobody will travel longer just to save a few Franks on a lift pass.

BETT has increased its appeal to Asian tourists by building a number of attractions for
non-skiers at the top of the mountain. There are restaurants catering to local tastes,
various shops, the Titlis Cliff Walk (the highest suspension bridge in Europe) and the Ice
Flyer (a ski lift over the ice cap). This should further reinforce its pricing power.

Ultimately, BETT’s superior competitive position can be seen in its figures. It has a 29%
operating margin and 18% post-tax return on equity.

Impressive Management

The business is run by Norbert Patt as CEO and Esther Schneider as CFO. Both were
brought in around 5 years ago after the previous management had been tainted by a
fraud perpetrated by a former employee. Since then, the management has done a great
job of building out distribution in Asia, pushing along major investments in particular in
the Titlis Resort and the new ski lift, and generally increasing the overall attractiveness
of the resort to both winter and summer guests. My impression of Norbert Patt is
someone who lives and breathes tourism.

One aspect of the management’s job that I do not envy them for is being overseen by
supervisory board members who have business interests with the Company. It is a
mystery to me how you are supposed to negotiate a wine contract for the restaurants or
an insurance contract for mountain rescue workers with someone who decides on your
salary or whether your employment contract is extended.

6
I understand the importance of having local people on the board given how intimately
the company is connected to the local economy and I also understand that the likelihood
of the local captains of industry having business interests with the biggest company in
the region.

Nevertheless, the current situation is unsatisfactory. The supervisory board is due to

undergo a generational change in the coming years. My hope is that the most egregious
conflicts of interest are not allowed to persist and a better balance is struck between
local people and out-of-towners.

Bargain purchase

The price we were able to purchase our shares looks a bargain. The market cap of
around CHF 110 m at cost compares to after tax earnings last year of CHF 18.4 m. This
implies a P/E of 6.0x. Excluding CHF 4 m after-tax profit from property sales, the P/E is
7.7x. The 2013 winter was neither particularly good nor particularly bad so current
earnings should be representative of earnings power going forward.

The deal is further sweetened by the fact that BETT has significant hidden property
assets. It owns a considerable amount of land in the town of Engelberg. It has developed
one plot into the “Titlis Resort”. I encourage you to look it up on the Internet - it has
been tastefully developed in my view: http://www.titlis-resort.ch/. This project has now
more or less been completed. It has sold almost 100 apartments and intends to retain
the remaining 35 for itself. The profit should be around SFr. 25 m, most of which has not
yet been realised and can be considered a hidden reserve in the balance sheet.
Compared to the market valuation of SFr. 110 m at the time of our purchase, this is a
pretty significant number.

Furthermore, BETT owns a plot of land around its Hotel Terrace. This plot is roughly the
same size as the one that was developed into the Titlis Resort. The location though is
superior – it is slightly elevated and enjoys the best views in Engelberg. As such, BETT
should be able to realise at the very least a similar profit to Titlis Resort, whereby this
depends on whether it decides to sell the land or develop it itself.

The company pays a dividend yield of 3.0% (at our cost) and historically has grown at
roughly 7% p.a. This should increase modestly over time as the faster-growing Chinese
tourism increases it overall share of revenues. This gives an owner return of 10%. 10%
is lower than I would normally aim for, but in view of the low valuation, the hidden
property assets and the improving growth potential, it strikes me that the experience of
the long-term owner could be better than that implied by the hoped-for owner return.

Why is the Company so cheap?

Leaving aside the not entirely unrealistic possibility that I have overlooked something in
my valuation, I think there are at least two reasons why we were able to buy the
company so cheaply.

First, I don’t think the company is generally considered “fair game” for the institutional
investor. As mentioned earlier, it is termed a “Liebhaberaktie” or something for the
hobby investor. Needless to say, I am uninterested in such conventions. My only interest
is whether a potential investment meets my investment criteria.

Second, it appears to be one of the rare cases of an overlooked small cap. To my

knowledge, there are no brokers who provide research on the company, probably
because the liquidity is too low to make it worthwhile. I have also never seen it in an
institutional portfolio, although admittedly this is not something I follow very closely.

7
A beneficiary of the EURO crisis

I mentioned earlier that BETT was a survivor of the EURO crisis. Actually, in one respect
it was a beneficiary, as counterintuitive as this might seem for a Swiss Franc business.
Although it generates 100% of its revenues in Swiss Francs, it actually benefits from a
weak Euro in the summer business. For the Asian tourist, the Swiss leg of the European
tour constitutes a fraction of the cost of the overall holiday (one out of seven days). The
bulk of the holiday is spent in Italy and France, both of which are part of the Euro. As
such, if the Euro loses against other major currencies including the Swiss Franc, the
overall holiday for the tourist still becomes cheaper.

One final thought on Gold

I have made my thoughts on gold pretty plain in the past, but I cannot resist drawing a
parallel between SFr. 10’000 invested in gold and SFr. 10’000 invested in BETT AG.

SFr 10’000 will buy you roughly 9 ounces of gold. If you store that gold at home and no
one steals it, in 50 years time it will still be 9 ounces and to the extent history is any
guide, it will maintain its purchasing power, i.e. today it would buy you roughly 120 ski
passes and in 50 years it should also. Contrast this with 10’000 SFr invested in BETT AG,
which would buy you roughly 60 shares. They would provide you with 1 free ski pass
p.a. and dividends to buy a further 4 passes, i.e. enough to ski for a week every year for
as long as you hold the shares. As BETT’s earnings power should correlate pretty closely
with the price of a ski pass, it is a pretty fair bet that in 50 years the 60 shares will still
finance 5 ski passes. In fact, given that BETT retains three quarters of its earnings in
order to make the ski resort more valuable, I think it is a fair bet that the dividend will
purchase more than 5 ski passes.

Imagine that: you can enjoy 50 years of free skiing PLUS own something more valuable
at the end of the period vs. 9 ounces of gold, which will be worth roughly the same in
real terms and will have done absolutely nothing for you in the meantime.

My point is not that everyone should own BETT AG and go skiing. My point is that
productive assets (such as ski resorts) are far more attractive to the long-term investor
than gold can ever be. There is no obligation to use dividends from BETT to go skiing any
more than dividends from Coca-Cola to buy soda.

Investor Meeting

On 17 May 2014, we held our 6th Annual Investor Meeting. There were more attendees
than ever before this year including, I am happy to announce, 9 children. This year, we
initiated a children’s program with the aim of interesting the younger generation in
investing. The children visited a car wash (kindly demonstrated by Mr. Suelzen in Bad
Godesberg) and the Haribo factory outlet. What an introduction! It is difficult to imagine
two finer businesses.

I am eternally grateful to my parents for introducing me to saving at an early age when

they took me to a building society to open a savings account. I can still remember the
delight of seeing my savings get 6% interest p.a. (fortunately, no one pointed out to me
at the time that inflation was running closer to 10%).

Opening a savings account today is unlikely to illicit a similar reaction to mine in children
given that interest rates are more or less zero. In any case for the long-term investor
(and the younger you are, the longer your time horizon), shares of companies are a far
better option. The children present at our meeting have a statistical life expectancy of a

8
further 75 years or so. SFr. 10’000 compounded at 10% over 75 years is SFr.
12’718’954.

“Aren’t the children a little young to be thinking about investing?” some of you enquired.
Well, if you decide to hold off another 15 years until they are adults, SFr. 10’000
compounded at 10% for 60 years is SFr. 3’043’816, so if you have a spare SFr. 10 m
lying around, be my guest.

Incidentally, at current rates, SFr. 10’000 in a Swiss savings account will be – doh! –
SFr. 10’000 in 75 years time, BUT never once will you have to wake up to the news that
the markets are down 10%. For the majority of the population, this is a pay-off worth
taking. I hope our children are not so foolish.

Yours sincerely

Robert Vinall