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Aquamarine Zurich AG 18 Ramistrasse CH-8001 Zurich Switzerland +41 44 210 1900 Aquamarine Capital 152 West 57th Street

25th Floor New York, NY 10019 +1 212 716 1350

Aquamarine Fund February 2012 report

Aquamarine Fund

Dear Partners of the Aquamarine Fund, Investment Results For the month of January 2012, Aquamarine Fund Inc. (off-shore) and Aquamarine Value Fund L.P. (on-shore) increased by +8.6% net vs. an increase of 4.4% for the S&P 500. Since inception (Sept. 1997), Aquamarine Fund Inc. has generated net returns of 238.4%, compared to a return of 42.6% for the S&P 500. Since inception (Oct. 2001), Aquamarine Value Fund L.P. has returned 111.7%, compared to an increase of 20.4% for the S&P 500. Assets Under Management Our assets under management stand at US$ 99 million. Subscriptions, Redemptions From the beginning of 2011 through January 2012, we received new subscriptions for a value of US$ 7.4 million. We also met redemption requests for US$ 3.45 million. Security Sales In the latter part of 2011, I sold t wo position. Both had been purchased in late 2007, and early 2008 i.e. before the Great Financial Crisis, and before I had initiated a checklist approach to investing. Discover Financial Services I purchased shares of Discover Financial Services (DFS) not long after they were spun out of Morgan Stanley in 2007. DFS has a unique asset in the financial services world namely a profitable closed loop credit card network: Similar to American Express, Discover both issues credit cards, and runs those transactions over its own network. This gives them the opportunity to be a feisty we try harder number t wo, relative to Amex in the same way Avis is to Hertz, or Pepsi is to Coke.

Aquamarine Fund February 2012 report

In the period after I purchased DFS, the company achieved a number of very positive milestones: The acquisition of Diners Club (and Carte Blanche) settlement with Mastercard and Visa, sale of its loss-making UK credit card division and very respectable credit performance through the Great Financial Crisis.

But from the time of purchase through March 2009, DFS shares had dropped 79%. With the company performing well in difficult circumstances and with no risk of insolvency (partly because of the government financial backstop) I was determined not to compound my mistake of overpaying with another one in importune selling, and so I held on to the stock. But I did not add to the position as I believed that I was being handed even better ideas, which was where excess cash was going. Towards the end of 2011, with the stock having recovered 400% close to the original purchase price, and with multi-bagger buy opportunities, I sold Discover to invest in what I believe will be 3-4 baggers over the next half a decade or less. The simple mistake that I had made when I purchased DFS was to overpay: At the time of purchase, the price to book was 7X and P/E 20 I hardly needed to be a genius to see this. However, in that exuberant period of 2007, I was overly focused on the idea of paying up for better businesses. My other purchase of 2007-2008 has very similar characteristics to DFS in terms of the business positioning and prospects. And I also over-paid for it. Since it is still in the portfolio, I prefer to defer the telling of the tale in a later letter. The narcissism trap: A new checklist item This is a subtle but powerful psychological trap that some investors succumb to, which results in their paying far too high a price for what is perceived to be a better business. The psychology goes like this:

All of you people who refuse to buy this stock because you say it is too expensive are just too dumb to appreciate the subtleties that make this such an incredible purchase. I on the other hand, am so smart, so experienced and so nuanced in my analysis that I am not fearful of paying up.
Of course, the person engaging in this behavior is completely unable to see what they are doing, and would bristle at the thought that this is what is going on. Moreover, in an environment where stock prices are going up, there is no doubt that behaving in this way delivers a powerful dose of endorphins to the brain.

Aquamarine Fund February 2012 report

I am not alone in having succumbed to this: Bill Millers experience towards the end of his tenure at Legg Mason may be the best and most well-known example. Consequently I have added a new item to my checklist, namely:

Am I purchasing this stock because there is some sort of psychological and/or non-financial reward, including possible narcissism?
The other protection against doing this is to be very circumspect in talking about what one owns and why. In total, I invested US$ 5.6 million in these t wo positions and will have taken out a little over $4 million. Purchases That $4 million from the two previously mentioned positions, as well as other cash has been recycled into a number of mouth-watering opportunities that were offered my Mr. Market during the swoon of late 2011. Indeed, the gratifying performance of January of this year is, I believe, only a foretaste of the returns to come. A neat idea that all value investors get after a while is that,

you dont make the money when you sell, you make the money when you buy
Charlie Munger has taken that one step further to saying that

the big money is made in the waiting

i.e. waiting for the right thing to buy, and then waiting and not tinkering while the position plays itself out. Charlie Munger is on the board of directors of the Daily Journal Corporation, which, until recently, sat on a mountain of cash relative to its size. And, to quote a friend,

in 2011 Daily Journal went all in on equities and put all of its cash into the shares of one company. Needless to say Aquamarine Fund is also a holder of shares in that
company. All of this is a long way of saying I am optimistic that the purchases will play out very well for us over the next few years.

Aquamarine Fund February 2012 report

Nassim Taleb and Anti-Fragility At the most recent Zurich.Minds event, Nassim Taleb posed the following question to the audience: What is the opposite of fragile? The overwhelming response from the audience was robust. Taleb then took the time to explain why robust is not the opposite of fragile. Robust is merely the negation of fragile: The true opposite of fragile is anti-fragile, to coin his phrase. Something is anti-fragile when, unlike crystal glass (fragile), or a rock (robust), it gets bet ter when mishandled: For example, if you cut off a head from the hydra of Greek myth, then more than one would grow back: That is anti-fragile. Why should we investors care? Much of the answer to this is discussed in his forthcoming book. But the short answer is as follows: In a world where much is fragile, and with potential black swans always lurking, to seek to predict the future is futile. Also futile, is to devote ever increasing resources to the sisyphean task of trying to better predict how the world will play out. What does help is to get good at recognizing what makes things anti-fragile and how to increase anti-fragility, while seeking to reduce, minimize and hopefully eliminate sources of fragility? At the recent VALUEx 2012 conference here in Zurich, I presented a versoin of the following slide, which represents my evolving thinking on this topic.

Increases Fragility
Fixed expense base Short duration funding Short redemption periods for funds Aggressive accounting Large amount of bezzle Concentrated portfolio Leverage / short term financing Fund of Funds Growth investing Momentum investing High regulatory power BAC Warrants Short puts

Decreases Fragility
Variable costs Permanent capital Investor lock ups Conservative accounting Self-directed investors Barbell approach Low price to value Checklists Berkshire Hathaway

Many of the changes that I have made since 2008 have been to make Aquamarine Fund more anti-fragile, so that we can benefit from dislocations, as I did in 2011

Aquamarine Fund February 2012 report

Performance expectations I believe that I will continue to out-perform the various indexes, although by how much I cannot say. My historic rate of outperformance over the last 14 years has been 6% better than the S&P, which is better than 98% or so of all mutual funds and pooled investment vehicles out there, so I believe that you are getting a good deal. For as long as the assets are at the current levels, I would be disappointed if I did not continue to deliver this. Our Value Proposition I continue to believe that Aquamarine Fund offers an extraordinary value to its investors. Low/No Management Fees It is not unheard of in the fund management industry for investors to be charged 2% or even 3-4% of their assets for the privilege of having their assets managed by some bank employee. At Aquamarine Fund, the maximum fixed fee that you would pay is 1%, and many investors have opted for the no management fee option. Spier Family is the largest investor; we eat our own cooking Your money gets pooled with Spier family assets - I and other members of the Spier family get exactly the same results that you do. No performance fees until fund regains new high I only get a performance fee if I exceed the last high plus a 6% hurdle. The last time I earned a performance fee was in 2007. I am gratified that we are now around 10% away from the high water mark, which means that all investors will be whole, no mat ter when they invested. No leverage, No margin loans, No short positions, No complexity I want to earn you a return by purchasing part ownership in businesses. In the past, banks have tried to entice me to engage in complex transactions and I had no trouble resisting. Businesses are the wealth creation engines of society, not derivatives.

Aquamarine Fund February 2012 report

2012 Annual Meetings I plan to hold three annual meetings in London, New York and Zurich. Dates and locations are as follows: London: Monday, October 1st Zurich: Wednesday, October 3rd New York: Monday, October 15th Invitations will be sent in late March. However, if you would like to rsvp sooner, you are welcome to do so via email to rsvp@aqfd.ch. Next opening: March 1st 2012 The next opening of Aquamarine Fund will be on March 1st, 2012. There are two classes of shares that are open with two different fee structures. i. Management fee of 1% of assets, performance fee of 20% of the profits above 4% ii. Management fee of 0% of assets, performance fee of 25% of the profits above 6% For more on this topic feel free to ask us for a document entitled, "Considerations on Investing in Aquamarine Fund," which is also available to you on the website. Thank you and referrals Part of my learning over the past three years has been rediscovering that I have a phenomenal set of investors - so thank you for investing with me. In connection with this, most of you, my investors, were referred to me by existing investors who were satisfied with my performance. So if you know of someone who you think would benefit from investing in Aquamarine Fund, please dont be shy. Please feel free to call me about referrals, or anything else via phone on +41 44 210 1900 or +1 212 716 1352 (Yes, it rings in Zurich!) or via email at gspier@aquamarinefund.com.

With warm regards,

Guy Spier CEO

Aquamarine Fund February 2012 report