3550 Lakeline Blvd., Ste. 170, #1715 • Leander, TX 78641 Ph (858) 354-7180 • Ph (512) 310-8545 • Fax (888) 302-3545

www.PacificaCapital.Net

January 7, 2018 Re: PCI Overview of 4th Quarter, 2018 Dear Pacifica Client, While Pacifica Capital Investments reports quarterly results, we do so with reluctance. Our focus is on generating long-term results, and our belief is that short-term performance is not meaningful. As demonstrated in the table on page 8, PCI’s long-term, aggregate results continue to be very rewarding for our clients. Overview - Time to Add Funds to PCI Accounts: Significant declines in the stock market give us the best opportunities to invest for long-term capital appreciation. These opportunities don’t come often, but we believe today may be one of the best opportunities for purchasing stocks that we have seen in almost 10 years. Over most of the past few years, asset prices have been very strong. We sold holdings with high market prices and built cash in our accounts to avoid the higher risks associated with inflated asset prices – to be ready for opportunities like we see today. We’ve often sounded like a broken record and touted the same points repeatedly over recent years. “Mr. Market” eventually yields opportunities though, and we are poised to take advantage. We have cash available for the bargains emerging in the market currently and for other opportunities if the volatility continues. Our historical results on page 8 demonstrate the benefits of having cash ready to take advantage of opportunities in down or volatile markets. 1. Critical Issues

A. Valuation Metrics: Prices are at Reasonable Levels - For the first time in years, the stock

market is offering attractive prices. There are a myriad of factors that contributed to December’s market decline, including: rising interest rates, trade war fears, recession concerns (both domestically and internationally), and others. Despite these macro-economic concerns, Pacifica focuses on investing in businesses with strong balance sheets and management teams with the ability to maintain successful operations in more challenging economic conditions. The recent market declines have caused prices across the board to fall. Therefore, we see some very reasonable valuations on companies we want to own for the long-term. Financial companies like Fairfax Financial (FRFHF), Goldman Sachs (GS), and Jeffries Financial (JEF) are trading at below book value (approximately 95% of book for FRFHF, approximately 84% of book value for GS, and approximately 52% of book for JEF). Even Berkshire Hathaway (BRKB) is trading at only approximately 125% of book value – the level at which Warren Buffett has said he will purchase his own stock because he doesn’t believe there are any better investments at that price. Alliance Data Systems (ADS), a newer holding of ours that has compounded its share price at an annual rate of over 15% since it became a public company in 2001, is trading at a price to earnings ratio of about 6.5 times. To put that in perspective, the overall market is trading at about a 15 times price to earnings

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multiple after the recent market rout (the historical mean is about 15.7 times). The last stock market and economic down cycle saw the over leveraged financial sector get creamed! To some extent, the market is afraid of a repeat. We believe the circumstances are different this time, and other sectors are more exposed to oversupply and inflated valuations. The companies we mentioned are some of the largest holdings we have been adding to Pacifica accounts in recent weeks, and we will continue to add these and other positions we also see as undervalued if prices move further downward.

Our other holdings show similar attractive valuations. Fairfax India and Fairfax Africa (both managed by Fairfax Financial) both trade at or substantially below their book values. L Brands – owner of Victoria Secret and Bath & Body Works – is selling 75% below its high of over $96 per share just three years ago. Other retail/consumer related businesses we own also currently selling at bargain prices include: Dicks Sporting Goods – down 50%; Build a Bear Workshop – down 83%; Collectors Universe – down 63%; and Hain Celestial – down 78%. We believe all these businesses will survive the “Amazon challenge” and their stock prices will return to higher levels consistent with their sizes and sustainable earnings.

B. Insiders are Buying – Insider sentiment has been continuously bullish at the end of 2018.

Corporate executives, directors, and beneficial owners are acquiring shares at a faster rate than they are selling shares – an event rarely seen. Additionally, the latest surveys of market sentiment suggest investors are pessimistic, which typically is a good sign for future returns as no one wants to buy stocks and the prices fall to reasonable buying levels. The most recent market sentiment survey showed just over 20% of investors are bullish—an extreme lack of optimism that does not occur often. Although we do not base our investment decisions solely on these types of indicators, they have proven in the past to signal good buying opportunities.

C. PCI Accounts Are Buying Also – Pacifica accounts overall were down somewhat in 2018, however, in aggregate Pacifica accounts outpaced the overall market. Pacifica typically outperforms the market in down markets and in times of volatility. Our conservative approach is to avoid the temptation to “miss out” on new record highs and be sure to be patient and prudent with the companies we buy and the prices we pay. We do now feel there are a number of well-managed and strongly-positioned companies trading at good (and some very good) values. We have been building cash reserves over the last few years, and we believe now is an opportunity to spend that cash. If the market continues to weaken, we will continue to spend our cash reserves. We would like to purchase additional shares of companies we already own in accounts (like Fairfax Financial, Berkshire Hathaway, Goldman Sachs, Alliance Data Systems, Jefferies, etc.). In addition, we have a list of other new companies that we would like to add to our accounts. We strongly encourage all clients to consider adding funds to your Pacifica-managed account at this time if at all possible. We are excited about the opportunities we see today and believe that our portfolio of companies is well-positioned for the years to come.

2. Global Trends

We remain focused on US based international businesses that will benefit from expanding economies in faster growing countries with large populations such as China, India, Brazil, etc. Nations in South East Asia (like Vietnam), parts of Africa, South America, and even Latin America will experience growth in their labor forces over the next many years which should contribute to accelerated growth and rising income levels. The most attractive growth opportunities are in these emerging countries of the world. We prefer to own North American-based companies due to preferable transparency and governance. Within

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those parameters though, the overwhelming majority of our capital is invested in global businesses such as Fairfax Financial, Goldman Sachs, Starbucks, and Berkshire Hathaway that will greatly benefit from expanding operations in those high-growth regions. Those four companies make up about 60% of the aggregate PCI portfolio outside of cash and equivalents. From a global perspective, we remain very concerned about aggressive worldwide government stimulus programs, increasing debt levels, unsustainable spending, excessive monetary policy, growing support of protectionist measures (including opposition to free trade agreements), and the inevitable, unintended consequences over the long-term of these actions (some of which we are starting to see unravel now). Public debt levels – almost across the board throughout the world – are rising to unsustainable levels. That trend has dramatically shifted control of resources from the private to the public sector. Pacifica remains skeptical of government sponsored solutions and interventions. We believe it is very likely they will eventually result in negative consequences, including: entitlement program rollbacks, pension fund defaults in both the public and private sectors, and municipal and sovereign bankruptcies and/or debt defaults. By concentrating our investments in companies with superior management, strong balance sheets, and solid global business prospects, we will best protect our capital over time against those dynamics. We have ongoing concerns about possible “spill over” effects from the serious issues in many countries:

Japan – after years of exploding government debt and increasing government market manipulation,

stagnant income levels and very slow growth; China – alarming growth in overall debt levels as well as a surge in speculative investments; Europe – also very high levels of debt in certain countries and overburdened social welfare systems; US – underfunded public and private pension funds and other obligations and the growing

likelihood of a major trade war with China; and Global – potential restrictions in movement of capital – including human, physical (trade), and

investment capital. 3. Economic Outlook

Leading economic indicators continue to be mostly positive, and the US economy is expanding at this time. In the event that changes significantly, we could see further weakness in the markets. We know the US economy is resilient, but we believe its sustainable long-term growth rate will be lower than it has been. In other words, the economic “pie” will not grow as fast in the future as it has in the past; so, selecting the best companies that can weather varying economic and political conditions and gain market share will be more critical than ever to investment success. Public policy decisions do make a difference over time. Lower taxes and less regulation will help economic growth; higher trade barriers will not. Public debt (federal, state and local) is a major long-term concern. In the short term, corporate debt levels appear to be excessive (see graph to left), while consumer debt appears to be in better shape this cycle (versus 2008/2009).

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4. The Investment Environment and Public Equity Markets

Our long-term expectation for the US market is for annual growth, including dividends, of just over 5% and for PCI’s average results to be better than that by a few percentage points net of fees. In fact, in just under 21 years of PCI management (March 1998 – December 2018), the overall market was up 237.2%. Meanwhile, PCI’s accounts, in aggregate, gained 674.3% - an approximate 10.2% compounded annual gain (see PCI Results and Performance Record on page 7 for details). As we have mentioned many times, interest rates and asset values historically have had an inverse relationship. If interest rates continue to rise, it is very likely that asset values will continue to see negative returns in the short run. While short-term rates have now risen from unsustainably low levels, longer-term rates have been more stable. Thus, the yield curve is flatter – usually a sign that slower economic growth is coming. We finally are seeing the buying opportunities we have been waiting for over the past many years. The market usually overreacts – moving further up and then down – than one might imagine based on the data. Additionally, the high levels of leverage (at all levels) could cause additional volatility and downside in the market. Therefore, we are trying to spend our cash as prudently as possible to build the best portfolio of companies for long-term returns. Again, we encourage all clients to consider adding cash to your account(s). Looking at history, the market is cheaper today than it has been in some time, but it could get even cheaper (see graphs to right)! To summarize, Pacifica does not attempt to time the market. We feel comfortable about the positioning of our accounts and our recent buys, but we think the market could move either way in 2019. If the market does continue to move down, our goal is to invest all of the cash in client accounts in the best quality companies at the best values. 5. Pacifica’s Portfolio Fairfax Financial and Berkshire Hathaway continue to be our two largest holdings and our two long-term favorites. We have no plans to shift from these two positions to others for potentially better short-term results. We also own smaller amounts of very solid companies with bright long-term prospects (Five Below, Goldman Sachs, Starbucks, and Alliance Data Systems). Of utmost importance to us has always been limiting the downside (risk) and focusing on long-term performance (reward). We are pleased that most of the companies we own have strong cash flows that allow them to raise their dividend payouts each year. We are mindful of the tax implications of our investment decisions. In a tax-free account (IRA, 401k, pension plan, foundation, etc.), we are much more willing to sell earlier and incur a gain than in taxable ones. In all accounts, Pacifica always considers the after-tax proceeds from a sale, and we especially try to avoid short-term capital gains in taxable accounts (for clients in the top tax bracket in California short-term capital gains can be taxed at combined federal and state rates exceeding 50%). Generally, if a client has both a taxable and a non-taxable account managed by Pacifica, we try to maximize the activity in the non-taxable account first to create the largest net after-tax gain for the client overall.

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6. Closing Thoughts

In conclusion, we believe now is a buyer’s market for certain sectors, especially financial-related businesses, and we will continue to invest cash reserves in accounts. We have conviction in our current portfolio of companies and feel that their business prospects are more favorable than those of the overall market. We sleep well at night because we believe our companies will be doing well in five and ten years in most any predictable economic environment. We hope you share that level of comfort. Over the last 20 years – since Pacifica has been managing public equity investments for its clients – the world has experienced multiple “shocks,” including: wars in Iraq and Afghanistan, significant natural disasters (hurricanes, earthquakes, tsunamis, floods, etc.), the rise of terrorism, including attacks in Europe, Africa, and the US; booms and subsequent busts in many industries (technology, internet, housing, raw materials, etc.); a credit-related crisis; significant shifts in political power bases and polices, and more. However, over a period that included all these “events”, our clients’ accounts have benefited from substantial appreciation. The primary reason for that success is because Pacifica has had the discipline and patience to adhere to our investment strategy as detailed in this letter and elsewhere (see pages 9 and 10 for more information on our investment strategy, or look on our website at www.pacificacapital.net). Please do not hesitate to contact us as indicated below with questions, comments, or to setup a time to review and discuss your account. Also, it is important that you contact us if there have been any changes in your financial situation, investment objectives, or if you desire to impose any reasonable restrictions or modify existing ones on your account. Sincerely,

Steve Leonard Kari Pemberton Managing Principal Principal, Chief Investment Officer steve@pacificacapital.net kari@pacificacapital.net 858-354-7180 512-337-5521 CC: Blake Isaacson Enclosure: Investment Positions Summary

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ADDENDUM TO PCI QUARTERLY LETTER

Pacifica News Real Estate Partnerships Over the last few years, Pacifica has again been directing investment partnerships in commercial real estate projects in certain West Coast markets, primarily Southern California and Colorado. Please note, investments in these real estate partnerships are limited to accredited investors only. If you qualify and have an interest in learning more about these opportunities, please contact us for further details about current projects. High-Yield Loan Fund RAF Pacifica Loan Opportunity Fund I, LLC (“RPL”) has also been formed to provide a higher yield alternative to money market and certificate of deposit (“CD”) returns on cash. It will fund loans that will be secured by real property at loan-to-value ratios that will range between 40% to 70% of appraised amounts with loan terms of six months to two years. RPL will serve as an alternative resource to borrowers who cannot secure financing for their real estate projects from traditional institutional lenders. Please note, investment in this fund is limited to accredited investors only. Please contact us if you are interested in learning more about this fund. Changes to Investment Preferences If you have had, or plan to have in the coming year, any changes that affect your financial situation or investment preferences please let us know us know as soon as possible. These changes could include anything from an address or phone number change to a change in your investment objective(s) or risk tolerance. You may at any time impose reasonable restrictions on the management of your portfolio. Please contact Mindy Marquez (at mindy@pacificacapital.net or 512-310-8545) or Kari Pemberton (at kari@pacificacapital.net or 512-337-5521) with any new information or changes in order for us to update our records.

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PCI’s Results and Performance Record

PCI has outperformed the market and has provided significant gains to its longest-term clients. More significantly, PCI accounts have not suffered nearly as much in the years when the stock market suffered its greatest losses. The following are PCI’s Performance Results from inception (1998) through 2018; they are compared to those of the S&P 500 Total Return Index. PCI accounts, in aggregate, vastly outperformed the overall market over the long-term because our declines were much less during periods of market weakness and our gains were generally better during periods of market strength. Over more recent periods Pacifica has underperformed versus the overall market. Our cautious outlook – due to our skepticism of market strength outpacing economic fundamentals – caused us to hold large cash balances, which have earned almost no return versus a very strong market. However, Pacifica typically outperforms the market in down markets and in times of volatility, and 2018 was no exception. We continue to believe our caution will be well rewarded by continued strong, long-term results.

We update this graph annually, as we do not believe comparisons for any shorter periods are meaningful.

 

 

*PCI performance for each year is unaudited and is a Time Weighted Rate of Return for that year, except for 1998‐2004, which is an Internal Rate of Return for those years. IRR is a dollar‐weighted return that accounts for contributions and withdrawals during the period. TWR is a time‐weighted return that effectively eliminates the effects of contributions and withdrawals and their timing. 1998 is a partial year. The S&P 500 Total Return measures the change from the start of the period to the end of the period, assuming no contributions and/or withdrawals and includes dividends. The “Total” is for the entire period, compounded annually. PCI results are shown net of all fees, including management fees, brokerage fees and custodial expenses, and reflect the reinvestment of all dividends and earnings. Performance results provided herein are the aggregate of all fully discretionary accounts managed by PCI, including those accounts no longer with PCI, and include the performance of the accounts of PCI’s principals (which do not incur management fees) and certain other accounts that have reduced management fees. Minimal leverage and short selling has been used since inception for the PCI managed accounts; the effects of such leverage and short selling on PCI’s performance figures have been nominal. Results for individual accounts are varied and will vary in the future. In addition, it is not likely that the relative performance of PCI’s managed accounts will exceed the performance of the broader stock market (as measured by the S&P 500 Total Return or other broad market indexes) by as large a margin as has occurred to date. The stock market faced an unprecedented decline in the year 2008, which strongly impacted the performance of the S&P 500 Total Return Index during the time period shown. In addition, PCI’s performance during the year 2000 was significantly enhanced by the strong performance of one large position in its accounts under management. The 12/31/18 total ending balance for all accounts was approximately $316 million and approximately $78 million was in accounts of PCI principals (Leonard and Pemberton family accounts). Total number of individual accounts was 271 as of 12/31/18  Past performance is not a guarantee or indicator of future results, and investors should not assume that investments made on their behalf by PCI will be profitable, and may, in fact, result in a loss. Investors also should not assume that PCI’s results will outperform the S&P 500 Total Return Index or other broad market indexes in the future. The investment objective of PCI’s managed accounts is capital appreciation. PCI’s strategy is to concentrate its investments in a limited number of positions with certain positions representing an  intentionally  large size  in the accounts. This concentration  is  likely to result  in greater volatility than the overall market as measured by the S&P 500 Total Return Index, which is made up of 500 large companies. The S&P 500 Total Return Index reflects both changes in the prices of stocks in the S&P 500 Index as well as the reinvestment of the dividend income from its underlying shares. The Index does not bear fees and expenses, and investors cannot invest directly in the Index. In addition, PCI’s strategy is to “hold for the long‐term” which reduces trading costs.

‐20%

80%

180%

280%

380%

480%

580%

680%

780%

Cumulative, Compound Return

Year

PCI vs S&P 500 TR

PCI S&P 500 TR

693.4%

252.7%

PERFORMANCE COMPARISON

*9 months only

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PCI’s Approach As we have written much about in the past, the investment approach that we employ in the management of your account is to focus on a limited number of businesses and industries at a given time. In that sense, your account is concentrated in industries that we feel we have a thorough knowledge of and in businesses that we have been able to purchase at prices below our estimation of their intrinsic value. While owning fewer stocks and concentrating on specific industries may result in increased account volatility, this investment philosophy has resulted in superior investment returns since 1998 as you can see from the PCI Results and Performance Record on page 8 of this report (please be advised that past performance is not a guarantee of future performance). In addition, we focus exclusively on equity purchases and do not attempt to invest your portfolio in bonds, commodities, or other miscellaneous types of investments. Any funds that are not invested in equities are placed in the money market to earn interest while we wait to buy (at our Buy Price) the investment opportunities on which we are focusing. Cash in your account may earn relatively low returns while we wait patiently for the businesses that we feel confident in to be offered by the market at the price we are willing to pay. As opposed to most money managers who invest relatively equal amounts of money in many different positions, we focus the largest part of our investment capital on our favorite companies. We also do our best to limit the number of different companies owned to those in which we have the most confidence and understanding. Using this strategy, PCI has kept our “losses” smaller and our “wins” more significant, and this dynamic is reflected in our superior, long-term compounded return. Our goal remains to be near 100% invested, but only when we can find very good businesses at very good prices. PCI concentrates investments in our favorite companies and those with very positive, long-term international growth prospects (see the Global Trends section at the beginning of this letter). We are also seeking to invest in companies that have a track record of paying, and/or that we believe are likely to pay, larger dividends over time. We favor investments that produce net cash flow that is either reinvested in the core businesses at high rates of return or paid out to the owners in the form of dividends. An additional component of our investment decision making is our concern about the possibility of much higher inflation at some point in the future and how the results from accompanying higher interest rates may affect valuations and business prospects. Thus, we are looking more favorably at companies that will be less adversely affected by higher inflation and ultimately, interest rates, as we believe the consequences to certain businesses and industries could be very severe.

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PCI’s Investment Philosophy PCI has outperformed the market because our strategy works, and we are generally disciplined in following our stated strategy. Initially, when the market becomes overvalued, we tend to sell stocks and hold more cash. Conversely, when the market is depressed we get emboldened and begin to invest our cash. We are constantly analyzing new businesses with the goal of determining attractive prices at which to purchase stock. In addition, we continually monitor changes in anticipated future operating results of the businesses in our accounts and update the estimation of their intrinsic value in order to determine prices at which we would be willing to buy more shares or sell existing ones. We have many companies on our Buy List (i.e., companies that we would like to own and whose stock prices have occasionally traded within approximately 20% of our Buy Price). These companies fall within our “intellectual and financial understanding”, and we patiently wait for stock price declines in these companies to our Buy Price. “Open buy limit orders” for many of these companies have been placed in most accounts to purchase these shares as the prices begin to come down to our Buy Price. We continue to study these companies to update our estimation of their intrinsic value and adjust our Buy Price accordingly. The discipline to maintain a consistent valuation process independent of the “investor herd mentality” is pivotal to the successful execution of PCI’s investment philosophy. Over the last 16 years market conditions have periodically allowed us to make additional purchases in existing positions and in new companies both at, and below, our Buy Prices. Our Buy Price must offer two very important attributes:

(1) a “discount” or margin of safety relative to our estimation of intrinsic value (2) a price that will provide the likelihood of strong investment returns over a reasonable holding period – the longer the better. Note: We are realistic in acknowledging that we won’t always be able to buy at the lowest prices. Rather, Pacifica aims for acquisition prices that should reward us with above average long-term returns.

We want to emphasize that we do not try to time the market. Generally, Pacifica neither sells stocks because we believe the overall market is overvalued, nor buys stocks because we believe the overall market may be undervalued. We focus on individual companies whose businesses we understand and buy them when we can be confident in our estimates of their intrinsic value and future profits. We still hope to become fully invested if the market weakens (including selling our preferred stock positions and reinvesting those proceeds in common stocks). The key for us is to have the discipline and patience to be able to invest in fine companies when the markets for their share prices are depressed. We believe successful investing requires the knowledge to be able to accurately value the business being acquired, as well as an understanding of market dynamics (psychology). We believe the stock market’s cyclical nature produces broad-based periods of overvaluation, fair valuation, and then undervaluation before the pattern reverses and repeats itself. This classic market cycle is driven by investor emotions during each period - greed near the markets peak, and fear as the market bottoms. To quote one of the great investors in history and a wonderful man who has passed away, John Templeton, “Bull Markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the maximum optimism is the best time to sell.” We believe this market cycle psychology is important to understand so that one does not make the mistake of following the herd mentality and suffering subpar investment returns. While it is impossible to determine exactly when each of these phases is entered, we know that today’s market is in the part of the cycle where the best buys are no longer easily found. While we cannot predict with accuracy when the next broad market buying opportunity will occur, we can say with confidence that we will try to be patient and wait for better bargains. The bottom line is that to be a good investor you need to not only buy when it is emotionally the hardest, and sell when emotionally it is the hardest, but also do nothing while waiting for market extremes to offer better opportunities. Sounds so easy, but it is so hard. You often don’t know you have been right until months or even years later. There is often no immediate gratification for the best of those decisions. At the end of this quarter, we believe that the market is at the part of the cycle where we primarily wait. While we wait we search for opportunities driven by company specific factors, and we continue to be very patient with limited investing activity. As we continue to preach tirelessly, successful investing is not about beating the market every quarter, or even every year, but beating the market over the long-term. This requires buying when conditions appear bleak and wisely pruning positions when conditions are unsustainably strong.

3550 Lakeline Blvd., Ste. 170, #1715 • Leander, TX 78641 Ph (858) 354-7180 • Ph (512) 310-8545 • Fax (888) 302-3545

www.PacificaCapital.Net

Investment Positions – Business Summary

Listed in approximate descending order of size in the aggregate of all accounts (within individual accounts, percentages will vary). Largest Positions Fairfax Financial – (FRFHF) (initial purchase in 2001, most recent purchase 2018) – A holding company that engages in property and casualty insurance and reinsurance worldwide. Fairfax owns significant operations in the United States, Canada and Europe, and most importantly, growing operations in much of the developing world. In addition to its insurance subsidiaries, Fairfax also owns a growing group of operating businesses, primarily based in Canada. Fairfax also recently began to manage separate investment fund companies in Africa and India focused on investing in public and private debt and equity instruments in these growth markets (two other Pacifica holdings -- see “Fairfax Africa and India” section below).

Business Outlook: Fairfax has managed its large investment balances (approximately three times its book value) shrewdly through various investment environments, while historically generating very attractive returns. Currently, its investment portfolio is positioned conservatively with roughly half of the portfolio in cash and treasuries. A decline in asset values will likely have a favorable impact on long-term returns, as it will give it the opportunity to deploy capital at attractive valuations. Underwriting results at Fairfax’s insurance subsidiaries were strong in 2018 (the company’s combined ratio of 96.6% through the first 9 months of 2018 means that it is being paid to hold money that it can invest to its own benefit. Our confidence in Fairfax is bolstered by the company’s top-notch management team, led by long time CEO Prem Watsa. Mr. Watsa has an excellent track record, having grown Fairfax’s book value by approximately 20% annually (after accounting for dividends paid) over 33 years. Fairfax’s pays an annual dividend of $10 per share, or roughly 2.3% of its recent stock price.

Investment Activity: Over recent months, Fairfax’s stock price has traded below our estimate of

intrinsic value. We have taken the opportunity to add shares in accounts with a limited position in this outstanding company. More recently, broad weakness in global financial markets has brought down Fairfax’s stock price even further to a level that we consider a significant discount to intrinsic value. We regard book value as a very attractive price at which to purchase shares of this excellent company. As of 9/30/2018, book value per share was over $452. Meanwhile, as we write this letter the stock is trading for roughly $420 per share. We regard this as a rare opportunity to purchase an excellent business with a first-class management team at a bargain price. As such, we have been buying shares in most accounts and will continue to do so at or below current prices.

Berkshire Hathaway – (BRKB) (initial purchase in late 1999, most recent purchase 2018) – Berkshire is a conglomerate that owns a variety of operating businesses as well as investments in public companies, bonds, and a large cash position. One of the strongest companies in the world as ranked by shareholder equity, the Warren Buffett-led firm employs an extremely prudent operating and investment philosophy. Berkshire’s largest and oldest operating businesses are its insurance subsidiaries. Berkshire’s insurance units have a combined float (money “borrowed” from policy holders) of over $118 billion (up from $65 billion since just 2010). Berkshire has profitable insurance underwriting businesses (not an easy feat) that enable it to hold and invest that float “for free,” plus make a profit on the underwriting business.

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Berkshire also owns and operates a multitude of other non-insurance businesses led by: BNSF Railroad, Berkshire Hathaway Energy, Marmon, Lubrizol, IMC, and Precision Castparts along with dozens of other smaller businesses. Berkshire’s non-insurance subsidiaries now account for well over half of Berkshire’s operating profits. Business Outlook: Berkshire’s current operating results and investment returns are strong. The

Omaha-based firm continues to increase its intrinsic value by using its robust cash flow for acquisitions and joint ventures and to take advantage of its rock solid financial strength over the long-term. Although Berkshire did not complete any major acquisitions in the last few years, Mr. Buffet likes to quip that he has his “elephant gun ready” should any opportunities present themselves. Berkshire tends to benefit during periods of market turmoil as its robust financial strength and excellent management team allow it to take advantage of opportunities that others are unwilling or unable to seize. As of 9/30/3018 Berkshire had over $103 billion in cash.

Investment Activity: At various points throughout 2018, Berkshire’s stock traded at prices below our estimate of intrinsic value. We took this opportunity to add shares in accounts with limited positions. We find it encouraging that over recent months key Berkshire executives have purchased significant amounts of stock, and the company itself has bought back meaningful amounts of stock – a strong indication that management shares our view that the current stock price is below intrinsic value. We will continue to add shares at or below current prices. Although it is counter-intuitive to some, we hope that shares of this excellent company trade lower (a possibility in periods of overall market weakness), as we cherish opportunities to add shares of this excellent company at bargain prices.

Medium-Sized Positions Five Below – (FIVE) (initial purchase 2015, most recent purchase 2016) – Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right merchandise targeted at the teen and pre-teen customer. With an assortment of products all priced at $5 and below, it offers a unique merchandising strategy and high-energy retail concept that aims to be fun and exciting. Products include branded and private label merchandise across several categories: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal. The average store size is approximately 7,500 sq. ft. FIVE began operations in 2002 and currently operates over 750 stores in 32 states.

Business Outlook: We believe FIVE has the potential for very strong and rapid growth over the next many years. While it has been expanding its store base at 20% per year, it still does not have stores within trade areas of the majority of the US population. We believe FIVE has the potential for 2,500+ stores in the US given its unique value proposition, fun shopping environment, and lack of direct competition. Simply put, FIVE’s results have been excellent. New stores continue to generate fantastic economics (the company generally recoups its entire investment in new stores within one year!). In fact, the 2018 class of new stores, like the 2017 class before it, is on track to be FIVE’s strongest ever – with first year sales exceeding $2 million per store. Equally impressive, even with its rapid new store growth, FIVE remains debt free and continues to build cash.

Investment Activity: We began buying shares in mid-2015 and continued at various times since when its stock price moved lower. During most of the last few years, the stock price has been above a level that we are willing to pay. After better-than-expected results in the first half of 2018, the stock price increased substantially to a level that we consider to be well above intrinsic value. We took that opportunity to sell shares in accounts with large positions. While we continue to like the long-term prospects of this company, we believe that at the current stock price much of the

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future growth is already priced in. We hope to buy back shares we sold upon a pullback in the price in the future.

Starbucks – (SBUX) (initial purchase 1998, most recent purchases in 2018) – Starbucks is one of the world’s leading consumer brands and should continue to show impressive growth in many international markets for years to come. Simply put, loyal customers around the world frequently visit Starbucks to enjoy one of their favorite, affordable, “addictive” indulgences.

Business Outlook: We think the Starbucks brand and customer loyalties are second to none. With Starbuck’s core North American business showing strong margins and moderate growth, it is now focused on new opportunities, such as: aggressively expanding internationally (especially in China and India), broadening food and juice offerings both in-store and in-grocery aisles, and expanding in-store services to include mobile ordering and delivery. Starbucks should continue to earn high returns on invested capital within existing and new markets while continuing to generate strong free cash flow and return cash to shareholders. Impressively, Starbucks has increased its dividend 23% to 30% each year for the past eight years. Starbucks pays a quarterly dividend of $.36 per share, or roughly 2.3% of its recent stock price on an annualized basis.

Investment Activity: Since the latter part of the 1990’s, we have owned a large position in Starbucks at numerous points – buying when the price is below our estimate of intrinsic value and selling when it is well above. Towards the end of the second quarter of 2018, Starbucks Founder and CEO, Howard Schultz, announced his retirement, and Starbucks also released quarterly results that were below expectations. The stock price fell significantly. We took that opportunity to add shares in accounts with limited positions. The price has since increased past a level at which we are comfortable adding more shares. We look forward to adding to our position if the stock price of this excellent company declines to a more attractive level.

Goldman Sachs - (GS) (initial purchase 2010, most recent purchase 2018) – A leading provider of financial services to the major institutional participants in global capital markets. Revenue sources include 1) trading, 2) investment banking, 3) asset management and security services, and 4) interest and income from balances and holdings. Goldman Sachs has grown its international presence, particularly in Asia, to take advantage of developing capital markets. Goldman Sachs is often ranked as the top operator worldwide across its range of financial services and offerings.

Business Outlook: Goldman Sachs has grown its book value per share from $20.94 at the end of

its first year as a public company in 1999 to approximately $197 as of 9/30/2018 – a compounded growth rate of over 14% including dividends paid. Keep in mind that during this period the stock market had a few very challenging periods, and many financial companies suffered severe setbacks. Nonetheless, Goldman Sachs outperformed its competitors, and its long-term shareholders have been handsomely rewarded. We are very impressed with Goldman Sachs’ management, industry position, strength in most emerging growth markets, durable reputation, and entrepreneurial culture. Goldman pays a quarterly dividend of $.80 per share, or 1.9% of its current stock price on an annualized basis.

Investment Activity: In late 2018, Goldman came under fire for their role in the “1MDB scandal,” a fraud involving the misappropriation of funds controlled by a Malaysian state-owned investment fund. While we do think there are likely to be some consequences related to Goldman’s role in the scandal, we think the market is significantly overreacting. Goldman’s book value as of 9/30/2018 was $75.5 billion. The highest estimates of the fines that could be imposed on Goldman are in the range of $5 billion pretax. Meanwhile, Goldman’s market value as we write this letter is

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around $61 billion. In other words, even if Goldman is made to pay a fine of $5 billion, the current stock price would still represent a nearly 15% discount to book value. We consider the current stock price to be a very attractive entry point and have been adding shares aggressively in most accounts.

Note: In the wake of the 1MDB scandal, several law firms have begun efforts to organize class action lawsuits alleging that Goldman Sachs management made false and misleading statements to investors regarding the company’s role in the scandal. While we do not believe Goldman’s management intentionally deceived investors, we think that by participating in such a lawsuit, shareholders will most likely receive some amount of compensation. Given the ease of participating, this strikes us as a “free lunch,” where we do not have to risk anything, but are likely to receive something. If you would like to learn more about these lawsuits and/or participate, please reach out to Blair Bodek at Blair@PacificaCapital.net for more information. 

Jefferies Financial Group (formerly Leucadia National Corp) – (JEF) (initial purchase 2014, most recent purchase 2018) – A diversified holding company that primarily operates in the investment banking and capital markets sector. Its main subsidiaries are the Jefferies Group LLC (investment banking), Berkadia (commercial mortgage financing, a 50/50 joint venture with Berkshire Hathaway), National Beef Packing (the fourth largest beef processor in the US), and various other financial, manufacturing, and energy businesses.

Business Outlook: Jefferies owns a variety of operating businesses, and it regularly buys and sells these businesses and their assets in order to realize value for shareholders. Over the past few years, Jefferies has been raising cash by refinancing debt at lower rates and strategically divesting non-core assets in an effort to position itself to take advantage of future investment opportunities and focus on its core investment banking business. We view this as a positive development that will enhance organizational focus and highlight the disconnect between the value of the core investment banking business and the company’s current stock price. Our confidence is bolstered by our belief that Jefferies is run by a high quality, conservative management team, with its interests directly aligned with those of shareholders. To this last point, over the last 10 years 75% of co-CEO’s Richard Handler and Brian Friedman’s compensation has been paid in stock, and neither of them has parted with a single share (other than a one-time sale to fund a tax obligation and sales of shares donated or sold for charitable purposes). We gain additional confidence in a management team whose compensation is so closely in line with performance for shareholders. Jefferies pays a quarterly dividend of $.125 per share, or 2.9% of its current stock price on an annualized basis.

Throughout 2017, better operating results at both Jefferies Group and National Beef significantly

improved Jefferies’ operating performance. The stock price rebounded dramatically – rising over 80% from 2016 lows to 2017 highs. More recently, broad market weakness in the financial sector has caused Jefferies stock price to decline meaningfully. In response, management initiated a massive buyback program aimed at repurchasing shares. Through the end of the third quarter buyback activity reduced the number of shares outstanding by almost 10%. We share managements view that the current stock price represents a significant discount to intrinsic value. As of 9/30/2018, Jefferies book value per share stood at roughly $33. In recent weeks the stock has been trading in the $16 to $20 range. In other words, the stock is trading at nearly half of book value – a price that we view as extremely attractive. We have been buying shares aggressively in accounts with holdings under 10% of total account value.

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Alliance Data Systems – (ADS) (initial purchase 2018) – Alliance Data Systems largest and most important business is Card Services (54% of revenue; 92% of operating income). Through this segment, ADS provides receivables financing for private label credit cards issued to customers of over 160 small-to-mid-sized retailers. Customers include Victoria’s Secret, Bath and Body Works, Williams Sonoma, Ikea, and Wayfair, to name a few. ADS also owns two smaller businesses: (1) Epsilon, a provider of data analytics and marketing services to businesses around the world, and (2) Loyalty One, a provider of loyalty marketing services to enterprises in retail, financial services, groceries, and other sectors worldwide.

Business Outlook: ADS attracted our attention because it has earned very strong returns on equity of over 30% for decades – higher than any other receivables financing business we know of. ADS is able to earn such high returns because it addresses the market in a unique way. Whereas all other private label credit card providers target massive accounts (companies like Wal-Mart and Amazon), ADS targets small to mid-sized retailers (their largest account, L Brands, is a roughly $1.75 billion portfolio). By staying within this “sandbox,” ADS can avoid significant competition, as (A) competitors are not interested in these accounts since they are too small to impact their massive receivables portfolios, and (B) competitors lack the necessary expertise to build high-quality marketing and loyalty programs around private label credit cards from the ground up. To this last point, ADS is the only competitor in this field that is not a bank holding company, and thus it is also able to provide data driven services. The company has world class expertise in building high-quality marketing and loyalty programs, which allows it to add value to retail clients by giving them complimentary access to its expertise in these fields. This creates a remarkably attractive proposition to many small to mid-sized retailers that lack the economies of scale to build high quality in house marketing and loyalty programs. Put simply, we believe Alliance Data’s consistently high returns reflect a durable competitive advantage. Further, we have a high degree of confidence in the company’s future as retailers continue to emphasize the importance of building relationships with their customers. ADS pays a quarterly dividend of $.57 per share, or 1.5% of its current stock price on an annualized basis. In late November, management announced its intention to divest the Epsilon business. Over the past five years, management has built a “mini-Epsilon” within its Card Services division that can provide customers with the same services that Epsilon provides. We like this move as it will allow management to focus more on its Card Services business, and we expect that Epsilon will command a more attractive valuation in a private transaction than public markets are giving it credit for under Alliance Data’s ownership

Investment Activity: Throughout 2018, Alliance Data’s stock price declined amidst concerns over

rising loan loss rates in its receivables portfolio and smaller issues in its non-core businesses. We made initial purchases towards the end of the second quarter at roughly ten times forward earnings. Since then, the stock price has declined further due to lingering concerns over the credit cycle peaking, and the market’s misreading of a significant shareholder selling shares. The shareholder in question has publicly stated that it is selling shares only to avoid regulatory requirements associated with having a position larger than 10%. The stock price now represents a very attractive multiple of roughly 6.5 times forward earnings. Since becoming a public company in 2001, ADS has grown its receivables portfolio and earnings during that time increased by over 20% annually. The stock price has followed in suit, compounding at over 15% annually (to the current stock price that we regard as undervalued. We view this company’s long-term performance as an indication of an exceptional business with limited direct competition and a first-class, shareholder-oriented management team. In our view, 6.5 times earnings is a very good price to pay for a company of this quality that is growing earnings at over 15% per year. We have been adding shares aggressively in most accounts.

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Smallest Positions MDC Holdings Inc. – (MDC) (initial purchase 2014, most recent purchase 2016) – A large homebuilder in selected markets in the United States whose subsidiaries operate under the name "Richmond American Homes." MDC also provides mortgage financing, primarily for MDC's homebuyers, through its wholly owned subsidiary, Home American Mortgage Corporation.

Business Outlook: MDC has a very conservative management team that navigated through the collapse of the housing market better than most of its competitors. MDC has a strong balance sheet and has benefitted as demand for single family housing continues to increase toward historical norms. While a lower supply of new homes relative to the population was expected after the overbuilding of the past decade, the market is returning to more normal levels. Looking at the demographics, we also believe there is a likely shift in demand coming from urban apartments to more suburban, single-family homes by Millennials as they marry and have children. We feel there is plenty of runway for MDC to continue to increase sales, margins, and profits in light of these trends. In addition, we believe MDC’s business model of “build to suit home development” versus the traditional “spec development” of larger builders is a key advantage. MDC pays a quarterly dividend of $.30 per share, or 4.3% of its current stock price on an annualized basis.

Investment Activity: MDC dropped to the top range of our buy price at points during 2014, 2015 and 2016 when we added shares to accounts with high cash balances and non-taxable accounts. During this time, MDC was hurt by its lack of inventory of developable land. The company has since increased its lot supply and is once again growing its community counts, revenues and margins. The share price has increased roughly 50% from 2016 lows. That improvement has stemmed both from improved operating performance as well as speculation that a solid economy and lower tax rates will continue to spur housing sector growth.

Build-A-Bear Workshop, Inc. – (BBW) (initial purchases 2017, most recent purchase 2018) – Build-A-Bear Workshop operates as a specialty retailer of stuffed animals, and their clothing, shoes, and accessories. Customers typically stuff and accessorize animals themselves in stores. Products are sold via company-owned stores, franchised stores, licensed retail products, and wholesale partners (like cruise ships).

Business Outlook: We believe Build-A-Bear offers a unique retail experience for children of all ages to create a personalized stuffed toy. New management started in 2013 and turned the chain around after it had overbuilt the concept in prior years. Now Build-A-Bear boasts a chain where substantially all stores generate positive cash flow, and in aggregate, stores in North America have 4-wall contributions in the mid-teens. Build-A-Bear is undertaking several initiatives, including: remodeling its current stores; expanding the store base through additional franchise locations; adding new and flexible store models in innovative locations like movie theaters and mall kiosks; and expanding its commercial and licensed channels. We believe Build-A-Bear’s fun shopping experience and creative means of being where the consumer is shopping are essential to be successful in today’s changing retail environment. Build-A-Bear has a strong balance sheet with no debt. It anticipates having cash of about $1.70 per share at year end, which is over 40% of the stock price at quarter’s end.

Investment Activity: We initiated our position in Build-A-Bear during the 1st quarter of 2017 as its share price was weak due to poor 4th quarter results. After better performance in the first half of 2017 caused the share price to rise, 2018 turned out to be a difficult year for Build-a-Bear as it was hit by a confluence of negative factors, including 1) a weak slate of blockbuster movie titles, 2) post-Brexit weakness in the United Kingdom combined with the negative impact on BBW’s

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marketing efforts caused by the enactment of General Data Protection Regulation (GDPR), requiring BBW to revamp its direct marketing program 3) continued weakness in mall traffic in the US, and 4) the short-term negative impact on the toy industry caused by a glut of cheap inventory hitting the market in the wake of the Toys R Us bankruptcy. We believe the company’s results will improve in 2019, in part due to the positive benefit of one of the strongest film slates in the history of the company, including popular titles like How to Train Your Dragon, Aladdin, Lion King, and Frozen. We are adding shares in select accounts but intend to keep this as a relatively small position.

Fairfax Africa and Fairfax India Holdings Corporations – (FFXXF and FFXDF) (initial purchases 2017 and 2015, most recent purchases 2018) – Investment holding companies created by Fairfax Financial (our largest holding – see page 1) to achieve long-term capital appreciation, while preserving capital, by investing in African and Indian businesses.

Business Outlook: Fairfax Africa and India were formed in 2017 and 2015, respectively, with Fairfax Financial as their largest owner. They were formed in order to capitalize on the growing African and Indian economies. We share Fairfax’s view that demographic tailwinds and political and economic reforms are likely to drive strong economic growth in these emerging economies. Further, we feel that a partnership with Fairfax in these growing economies is likely a long-term winner for Pacifica clients. Broad weakness in emerging markets throughout 2018 afforded these two holding companies numerous opportunities to deploy capital into both debt and equity instruments.

We initially tried to participate in the IPO of Fairfax Africa and Indian shares, but as a new, foreign offering, restrictions with our US custodians prevented us from doing so. In early 2016 and 2017 we added shares of both funds at or near their IPO prices. In the second half of 2017, both of their prices surged well above our estimate of intrinsic value, and we took the opportunity to sell shares. More recently, weakness in emerging markets has caused their share prices to trade lower. We view that reaction as an opportunity: weakness in African and Indian markets should allow FFXXF and FFXDF to deploy capital into attractive opportunities. We have taken the occasion presented by lower stock prices to add shares selectively.

L Brands – (LB) (initial purchase 2017, most recent purchase 2018) – L Brands is a specialty retailer of women’s intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria’s Secret (including PINK), Bath & Body Works, and International.

Business Outlook: We believe L Brands operates in niche retail markets where it is a category leader. Its brands maintain strong loyalty, and its stores generate strong returns (99% of its stores are cash flow positive, and the average store level return we estimate is over 20%). The price of L Brands’ stock has declined dramatically over the past year due to: (1) weak same store sales at the Victoria Secret brand, and fashion trends moved toward bralettes and away from their core product of constructed bras; (2) the PINK line decelerated some, albeit from very high levels; and (3) Bath & Body Works comparable store sales have been choppy. This combination of factors caused the stock price to drop over 50% from its high at the end of 2016. We like L Brands for its strong cash flow generation, strong brands, and strong dividend yielding nearly 5% based on the share price at the end of the 4th quarter. We also like management’s history of sensible capital allocation.

Investment Activity: We made initial purchases of L Brands in some accounts at $35 to $40 per share toward the tail end of 2017. Following a series of positive news reports, the stock price

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surged over 70% and finished 2017 just over $60 per share. More recently, the price has retreated to below our initial purchase price amidst weaker than expected quarterly results and broad market weakness. We have taken this opportunity to continue to add shares in accounts with limited positions. We want to own this company long-term as we expect LB to benefit from a rebound in their core Victoria’s Secret business, continued strong performance in the Bath & Body Works segment, and very attractive growth opportunities internationally (particularly in China). L Brand’s stock price was considerably higher just a few years ago – trading close to $100 in late 2015.

Sold Positions Below is a list of positions that we sold out of completely in 2018. In aggregate, these positions produced modest gains for our clients over the term of our ownership

Fossil Group – (FOSL) (Initial purchase 2015, most recent purchase 2017) – We thought it would be worthwhile to give a deeper level review of our investment in Fossil. We became interested in the company as its stock price began a steep fall – declining from $130 a share in 2013 to around $30 a share in 2016. As we began to dig into their business and management, we felt that this decline was too extreme. We received positive feedback from our research on their portfolio of brands, and we believed that the stock market was overreacting to the threat from “smart watches”. We believed Fossil was in a good position to capture its fair share of the “smart watch” market given its relationship with Google’s android operating system and its stylish brands, including a license to develop and sell Michael Kors branded watches. In 2016 we began buying a limited amount of shares and continued to do so as its share price fell below $10 a share in late 2017. As the stock price reached below $10 later in 2017, the unrealized declines in the overall Fossil position were steep (around 50% in most client accounts). We heard from many clients voicing concern with the large, unrealized loss. However, our field research continued to tell us that its new “smart/connected” watches were being well received by Fossil’s retail partners and customers. When Fossil announced quarterly results that substantially exceeded the market’s expectations, and the stock price spiked almost 100% in one day, we made the decision (with hindsight, an overly hasty decision) to sell out of our entire position for a small, overall loss. Over the following months, Fossil’s share price continued to recover over another 100% and has exceeded our average buy price by a significant amount. We take the time here to highlight these details to reemphasize that successful investing requires a willingness to bet against the herd and maintain conviction in the face of disconfirming evidence. We spend extensive amounts of time conducting research on the companies we invest in and pride ourselves on knowing our investments extremely well. Many times, after we make a purchase, the price of a stock will initially move against us. We typically use this opportunity to add shares at a price that represents an even more attractive discount to our estimate of intrinsic value. This process can be difficult to implement, and in the case of Fossil we put too much weight on our clients’ feedback. We constantly question our investment process and strive to improve, especially in the face of our occasional mistakes. Fossil was an all too important reminder that Mr. Market’s wild swings can last longer and move further than one would expect, but that as investors we must tune out the noise and stay focused on our investment fundamentals.

Mattel – (MAT) (initial purchase 2017, most recent purchase 2018) – Mattel is in the midst of a turnaround focused on improving efficiency, growing internationally, and most importantly,

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extracting more value out of its intellectual property (comprised of the strongest portfolio of brands in the toy industry). Thus far, the turnaround has been marked by high executive turnover and choppy financial results leading to a high level of volatility in the stock price. We like Mattel because of its strong brand portfolio, and we think that management is implementing the right plan to turn around the business. Nevertheless, the uncertainty surrounding its turnaround and its high levels of debt caused us to sell the position during the second quarter as its price increased to our estimate of intrinsic value. We would be happy to reinitiate a position in MAT if the price drops below our buy price.

Rent-A-Center – (RCII) (initial purchase 2018) – We initiated a position in Rent-A-Center in early June of 2018 at an average cost of $10.50 per share. At the time, we expected that a new management team would improve the business and generate a more reasonable level of profitability, leading to either a higher stock price or a sale of the business. On June 18th, the board announced plans to sell the company to Vintage Capital, a PE firm, at $15 per share, and the stock price increased to slightly below $15. On December 18th, Rent-A-Center announced that they were backing out of the deal, an indication that improved performance at the business made board members feel as though the buyout price was too low. In response, the stock price increased to around $15.50, and we took the opportunity to sell all shares held in PCI accounts.