81991648 Aquamarine Fund February 2012 Letter

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Aquamarine Fund February 2012 report

Aquamarine Zurich AG18 Ramistrasse

CH-8001 ZurichSwitzerland

+41 44 210 1900

Aquamarine Capital152 West 57th Street

25th FloorNew York, NY 10019

+1 212 716 1350


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Aquamarine Fund

Dear Partners of the Aquamarine Fund,

Investment ResultsFor the month o f January 2012, Aquamarine Fund Inc. (off-shore)and Aquamarine Value Fund L.P. (on-shore) increased by +8.6% net vs. an increaseof 4.4% for the S&P 500.

Since inception (Sept. 1997), Aquamarine Fund Inc. has generated net returns of238.4%, 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 ManagementOur assets under management stand at US$ 99 mil lion.

Subscriptions, RedemptionsFrom the beginning of 2011 through January 2012, we received new subscript ionsfor a value of US$ 7.4 million. We also met redemption requests for US$ 3.45million.Security SalesIn the latter part of 2011, I sold two position. Both had been purchased in late 2007,and early 2008 i.e. before the Great Financial Crisis, and before I had init iated achecklist approach to investing.

Discover Financial ServicesI purchased shares of Discover Financial Services (DFS) not long after they were spunou t of Morgan Stanley in 2007. DFS has a unique asset in the financial servicesworld namely a prof itable closed loop credit card network: Similar to AmericanExpress, Discover both issues credi t cards, and runs those transactions over i ts ownnetwork. This gives them the oppor tuni ty to be a feisty we try harder numbertwo, relative to Amex in the same way Avis is to Hertz, or Pepsi is to Coke.


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In the period after I purchased DFS, the company achieved a number of very positivemilestones: The acquisition of Diners Club (and Carte Blanche) set tlement withMastercard and Visa, sale of its loss-making UK credit card division and veryrespectable credi t per formance th rough the Great Financial Crisis.

But f rom the t ime of purchase through March 2009, DFS shares had dropped 79%.With the company performing well in dif ficult circumstances and wi th no risk ofinsolvency (part ly because of the government financial backstop) I was determinednot to compound my mistake of overpaying wi th 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 Iwas 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 theoriginal purchase price, and with multi-bagger buy opportunities, I sold Discover toinvest 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 thetime of purchase, the pr ice to book was 7X and P/E 20 I hardly needed to be agenius to see this. However, in that exuberant period of 2007, I was overly focusedon the idea of paying up for better businesses.

My other purchase of 2007-2008 has very similar characteristics to DFS in terms ofthe business positioning and prospects. And I also over-paid for i t. Since it is still inthe port fo lio, I prefer to defer the telling of the tale in a later let ter.

The narcissism trap: A new checklist itemThis is a subtle but po wer ful psychological trap that some investo rs succumb to,which results in their paying far too high a price for what is perceived to be a betterbusiness. The psychology goes like this:

All of you people who refuse to buy this stock because you say it is tooexpensive are just too dumb to appreciate the subtleties that make this suchan incredible purchase. I on the other hand, am so smart, so experienced andso nuanced in my analysis that I am not fearful of paying up.

Of course, the person engaging in this behavior is comple tely 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 doubttha t behaving in this way delivers a powerful dose of endorphins to the brain.


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I am not alone in having succumbed to this: Bill Mil lers experience towards the endof his tenure at Legg Mason may be the best and most well-known example.Consequent ly I have added a new i tem 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 aboutwha t one owns and why.

In to tal, I invested US$ 5.6 million in these two positions and will have taken out alit tle over $4 million.

PurchasesThat $4 million from the two previously ment ioned posit ions, as well as other cashhas been recycled into a number of mouth-water ing opportunit ies that were

of fered my Mr. Market during the swoon of late 2011. Indeed, the grat ifyingperformance of January of this year is, I believe, only a foretaste of the returns tocome.

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 youbuy

Charlie Munger has taken that one step fur ther to saying tha t

the big money is made in the waiting

i.e. waiting for the right thing to buy, and then waiting and not tinkering while theposition plays itself out.

Charlie Munger is on the board of directors of the Daily Journal Corporation, which,un ti l 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 sharesof one company. Needless to say Aquamarine Fund is also a holder o f shares in thatcompany.

All o f this is a long way of saying I am optimistic that the purchases will play out verywel l for us over the next few years.


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Nassim Taleb and Anti-FragilityAt the most recent Zurich.Minds event, Nassim Taleb posed the fo llo wing questionto the audience: What is the opposite of frag ile? The overwhelming responsefrom the audience was robust. Taleb then took the time to explain why robustis not the opposite of fragile. Robust is merely the negat ion of fragi le: The true

opposite of fragile is an ti-f ragile, to coin his phrase. Something is anti-f ragilewhen, unl ike crystal glass (fragile), or a rock (robust), it gets better whenmishandled: For example, if you cut off a head from the hydra of Greek myth, thenmore than one would grow back: That is anti- fragile.

Why should we investors care? Much of the answer to th is is discussed in hisfo rt hcoming book. But the short answer is as fol lows: In a world where much isfragile, and wi th potential black swans always lurking, to seek to predict the futureis fu ti le. Also futi le, is to devote ever increasing resources to the sisyphean task oftrying to better predict how the world will play out.

What does help is to get good at recognizing what makes things anti-f ragile andhow to increase anti-f ragil ity, while seeking to reduce, minimize and hopefullyeliminate sources of fragi li ty? At the recent VALUEx 2012 conference here in Zurich,I presented a versoin of the following slide, which represents my evolving thinkingon 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 ant i-f ragi le, so that we can benefit from dislocations, as I did in 2011


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Performance expectationsI believe that I will cont inue to out-perform the various indexes, although by howmuch I cannot say. My historic rate of outper formance over the last 14 years hasbeen 6% better than the S&P, which is bet ter than 98% or so of all mutual funds andpooled investment vehicles out there, so I believe that you are get ting a good deal.

For as long as the assets are at the current levels, I would be disappointed if I did notcontinue to deliver this.

Our Value PropositionI continue to believe that Aquamar ine Fund o ffers an extraordinary value to itsinvestors.

Low/No Management FeesIt is not unheard of in the fund management industry for investors to becharged 2% or even 3-4% of their assets for the privi lege of having theirassets managed by some bank employee. At Aquamarine Fund, the

maximum f ixed fee that you would pay is 1%, and many investors have optedfor the no management fee option.

Spier Family is the largest investor; we eat our own cookingYour money gets pooled wi th Spier family assets - I and o ther members of theSpier fami ly get exactly the same results that you do.

No performance fees until fund regains new highI only get a performance fee if I exceed the last high plus a 6% hurdle. Thelast time I earned a performance fee was in 2007. I am grat if ied that we arenow around 10% away from the high water mark, which means that all

investors will be whole, no matter when they invested.

No leverage, No margin loans, No short positions, No complexityI want to earn you a return by purchasing part ownership in businesses. Inthe past, banks have tr ied to entice me to engage in complex transactionsand I had no trouble resisting. Businesses are the wealth creation engines ofsociety, not derivatives.


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2012 Annual MeetingsI plan to hold three annual meetings in London, New York and Zurich.

Dates and locations are as follows:London: Monday, October 1

st

Zurich: Wednesday, October 3rd

New York: Monday, October 15

th

Invitat ions will be sent in late March. However, if you would like to rsvp sooner, youare welcome to do so via email to [email protected] opening: March 1st 2012The next opening o f Aquamarine Fund will be on March 1st, 2012.

There are two classes of shares that are open wi th tw o di f ferent fee structures.i. Management fee of 1% of assets, performance fee of 20% of the prof its above

4%ii. Management fee of 0% of assets, performance fee of 25% of the pro fi ts above

6%

For more on this topic feel free to ask us for a documen t ent it led, "Considerat ionson Investing in Aquamarine Fund," which is also available to you on the website.

Thank you and referralsPart of my learning over the past three years has been rediscovering that I have aphenomenal set of investors - so thank you for investing with me.

In connection with this, most of you, my investors, were referred to me by existinginvestors who were satisfied with my performance. So if you know of someone whoyou th ink would benef it from investing in Aquamarine Fund, please don t be shy.

Please feel free to call me about referrals, or anything else via phone on +41 44 2101900 or+1 212 716 1352 (Yes, it r ings in Zurich!) or via email [email protected].

With warm regards,

Guy SpierCEO

Documents

81991648 Aquamarine Fund February 2012 Letter