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Rangeley Capital Podcast

Rangeley’s portfolio managers go beyond investing. We discuss investments, articles, and events. Tune in each week for discussion and guest interviews. This week, we introduce our new podcast and talk about The Planet-Saving, Capitalism-Subverting, Surprisingly Lucrative Investment Secrets of Al Gore , a favorite investment for the remainder of the year, and Donald Trump. In future weeks, we will discuss new investment ideas as well as the books and articles that change how we think. We will also interview guests from the far corners of the value investing universe. If you have ideas for topics that you would like to hear us discuss or questions that you would like to have answered, please comment below. Finally, if you want a cooler name than Rangeley Capital Podcast, please offer suggestions. The Rangeley Capital podcast is hosted by Andrew Walker and Chris DeMuth Jr, two Rangeley Capital portfolio managers. Click here to subscribe to this weekly podcast.

What Happens In The Real World: The Average Joe Broad Market Portfolio Q3 Update

Summary About the Average Joe broad market portfolios. The Q3 drop in the major averages. The results of the portfolios. Introduced to the SA audience earlier in the quarter ( here ), the Average Joe Broad Market portfolio(s) seek to provide a methodology and platform for the Average Joe to perform real world comparisons to the broader market. Since these are passively managed portfolio(s) requiring little interaction, they can also be used to amass a decent retirement account with a minimalist approach. There a lots of ways to make money out there. Some of them are a bit slower. Alright, a lot slower. The third quarter of 2015 is now in the books so let’s review the changes and results to the portfolios. The AJ Broad Market Portfolio concentrates its investments in three broad market index funds, the State Street Global Advisor’s SPDR S&P 500 ETF (NYSEARCA: SPY ), Invesco’s Powershares QQQ (covering the NASDAQ 100(NASDAQ: QQQ ), and another State Street Global Advisors product covering the Dow Jones Industrial Avg., the SPDR Dow Jones Industrial Average (NYSEARCA: DIA ). A new portfolio was started each year beginning 1/1/2000 with weekly data provided by Yahoo (Author’s note: Yahoo weeks are listed as the “week of _____.” These portfolios therefore are not on a fiscal nor calendar quarter. Instead, they begin with the first Monday of every quarter and end on the last day of the week of the last Monday of the quarter. This could actually fall into the following calendar quarter as it does in this Q3 review.). For other rules applied to the input of cash and the methods used to make purchases, please see Part 1. About the Averages The S&P 500 began the fiscal quarter at 2076.72 and ended down 125.36 (-6.036%) to 1951.36. While this is a steep drop for the quarter, the October 2nd fiscal close puts the decline for the year at a more manageable -4.57%. In an article/video published on 10/5 on Yahoo, Estimize ( estimize.com ), the open financial estimates platform, reported that current expectations for S&P 500 Q3 earnings will reflect a 2.2% decline. That leads to a big question. Are the earnings baked into the prices yet or do we still have more losses ahead. The NASDAQ 100 followed suit for the quarter dropping 152.7 from the beginning of the quarter (4420.15), ending at 4267.45 (-3.454%). The index is still in positive territory for the year, but trimming its gain to just 54.07 points or 1.283%. The Dow Jones Industrial Average continued the trend for Q3, losing 1288.04 points to finish at 16472.37. This is a -7.252% drop for the quarter and a -7.132% drop for the year. The Average Joe Broad Market Portfolios With a new portfolio starting every year since 2000, there’s never a shortage of data to crunch. First, let’s start with the beginning and ending positions of each fund. Fund Start SPY Shares End of Q2 SPY Shares End of Q3 QQQ Shares End of Q2 QQQ Shares End of Q3 DIA Shares End of Q2 DIA Shares End of Q3 2000 54 54 55 55 46 54 2001 46 46 46 46 38 46 2002 38 38 38 38 38 38 2003 31 39 31 31 31 31 2004 31 31 23 23 23 23 2005 23 23 23 23 19 19 2006 19 19 19 19 15 15 2007 15 15 15 15 11 15 2008 11 11 11 11 11 11 2009 11 11 11 11 7 7 2010 7 7 7 7 7 7 2011 5 7 5 5 5 5 2012 5 5 3 5 3 3 2013 4 4 2 2 2 2 2014 2 2 2 2 1 2 2015 1 1 1 1 1 1 Next, the update on the values including input, quarterly gain/loss and gain/loss since portfolio inception. Fund Start Portfolio Value End of Q2 Q3 Cash Input Cash Position Investments Value Total Value Q3 Gain or Loss Q3 % G/L G/L since Inception 2000 $26,021.14 $585.00 $136.08 $25,137.33 $25,273.41 ($747.74) -2.87% $9,162.41 2001 $22,599.90 $507.00 $533.42 $21,324.68 $21,858.10 ($741.79) -3.28% $8,050.10 2002 $18.821.95 $455.00 $661.12 $17,616.04 $18.277.16 ($544.79) -2.89% $6,451.16 2003 $16,645.10 $403.00 $273.46 $15,930.90 $16,204.36 ($440.74) -2.65% $6,152.36 2004 $13,170.75 $351.00 $603.34 $12,222.26 $12,825.60 ($344.75) -2.61% $4,336.60 2005 $10,888.78 $299.00 $623.81 $10,004.02 $10,627.83 ($260.95) -2.40% $3,493.83 2006 $ 8,790.39 $247.00 $432.99 $ 8,149.70 $ 8,582.69 ($207.70) -2.36% $2,595.69 2007 $ 7,149.38 $221.00 $ 76.86 $ 6,953.70 $ 7,030.56 ($118.82) -1.66% $2,008.56 2008 $ 5,921.86 $195.00 $728.06 $ 5,099.38 $ 5,827.44 ($ 94.41) -1.59% $1,670.44 2009 $ 5,104.82 $169.00 $588.54 $ 4,441.06 $ 5,029.60 ($ 75.22) -1.47% $1,627.60 2010 $ 3,711.20 $143.00 $424.97 $ 3,245.06 $ 3,670.03 ($ 41.17) -1-11% $ 919.03 2011 $ 2,807.31 $117.00 $ 72.60 $ 2,707.88 $ 2,780.48 ($ 26.83) -0.96% $ 576.48 2012 $ 2,112.36 $104.00 $112.27 $ 1,988.74 $ 2,101.01 ($ 11.36) -0.54% $ 353.01 2013 $ 1,488.12 $ 91.00 $186.71 $ 1,317.14 $ 1,503.85 ($ 6.93) -0.47% $ 163.85 2014 $ 962.40 $ 78.00 $ 56.42 $ 927.16 $ 983.58 $ 21.18 2.20% ($ 5.42) 2015 $ 614.91 $ 65.00 $190.02 $ 463.58 $ 653.60 $ 38.69 6.30% ($ 36.40) And the dividend and yield data: Fund Start Dividends Received Q3 Yield (on Value) Yield (on Cost) 2000 $123.46 1.90% 2.75% 2001 $109.31 1.93% 2.92% 2002 $ 93.47 1.99% 2.98% 2003 $ 76.25 1.83% 2.77% 2004 $ 64.60 1.93% 2.96% 2005 $ 51.76 1.90% 2.86% 2006 $ 41.93 1.91% 2.74% 2007 $ 34.29 1.92% 2.59% 2008 $ 27.06 1.83% 2.88% 2009 $ 22.25 1.74% 2.88% 2010 $ 17.22 1.86% 2.74% 2011 $ 12.30 1.75% 2.18% 2012 $ 9.89 1.87% 2.32% 2013 $ 6.93 1.86% 2.32% 2014 $ 4.44 1.85% 1.87% 2015 $ 2.46 1.60% 1.95% Current Expectations The intent of these portfolios is to show the real results of the market, one that even the little guys, the average Joe’s can build. It will amass to wealth over time, but it is slow moving and prone to many whip-saw antics in the short run. This quarter is a perfect example of how a quarter can change long-term projections. The tables below shows the current growth rate and the expected portfolio value at 20, 25, 30 and 35 years based on the Q2 and Q3 closes. The Q3 dip did considerable damage to the older portfolios while the newer ones fared better based on the size of the cash input rather than market changes. 2000 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 8.4353% $54,269.54 $112,121.92 $214,894.36 $389,271.82 Q3 7.4110% $49,722.27 $100,719.91 $188,832.05 $333,778.68 Difference -1.0243% ($ 4,547.27) ($ 11,402.01) ($ 26,062.31) ($ 55,493.14) 2001 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 8.9419% $56,744.68 $118,457.28 $229,688.59 $421,488.74 Q3 7.7992% $51,377.73 $104,834.63 $198,151.43 $353,429.82 Difference -1.1427% ($ 5,366.95) ($ 13,622.65) ($ 31,537.16) ($ 68,058.92) 2002 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 8.9246% $56,657.42 $118,232.41 $229,159.78 $420,328.64 Q3 7.7529% $51,176.13 $104,331.32 $197,006.19 $351,003.16 Difference -1.1717% ($ 5,481.29) ($ 13,901.09) ($ 32,153.59) ($ 69,325.48) 2003 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.9939% $62,427.06 $133,331.41 $265,246.35 $500,865.21 Q3 8.7847% $55,959.67 $116,438.32 $224,950.44 $411,116.55 Difference -1.2092% ($ 6,467.39) ($ 16,893.09) ($ 40,295.91) ($ 89,748.66) 2004 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.3866% $59,052.89 $124,444.74 $243,866.38 $452,819.50 Q3 8.0701% $52,581.31 $107,852.39 $205,048.52 $368,112.68 Difference -1.3165% ($ 6,471.58) ($ 16,592.35) ($ 38,817.86) ($ 84,706.82) 2005 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.6044% $60,232.88 $127,534.63 $251,255.28 $469,317.85 Q3 8.2226% $53,276.59 $109,605.63 $209,079.28 $376,747.06 Difference -1.3818% ($ 6,956.29) ($ 17,929.00) ($ 42,176.00) ($ 92,570.79) 2006 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.4431% $59,356.13 $125,236.94 $245,756.14 $457,028.17 Q3 7.9500% $52,042.67 $106,499.14 $201,949.24 $361,500.35 Difference -1.4931% ($ 7,313.46) ($ 18,737.80) ($ 43,806.90) ($ 95,527.82) 2007 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.5552% $59,963.08 $126,826.43 $249,557.47 $465,516.79 Q3 8.0202% $52,356.29 $107,286.55 $203,751.34 $365,342.29 Difference -1.5350% ($ 7,606.79) ($ 19,539.88) ($ 45,806.13) ($ 100,174.50) 2008 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 10.4279% $65,006.71 $140,230.05 $282,110.25 $539,404.49 Q3 8.6808% $55,449.00 $115,129.74 $221,891.10 $404,446.28 Difference -1.7471% ($ 9,557.71) ($ 25,100.31) ($ 60,219.15) ($ 134,958.21) 2009 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 12.8882% $82,817.34 $190,156.98 $410,397.39 $848,582.02 Q3 10.8746% $67,820.57 $147,855.41 $301,011.00 $583,235.22 Difference -2.0136% ($14,956.77) ($ 42,301.57) ($ 109,386.39) ($ 265,346.80) 2010 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 11.3194% $70,792.82 $156,020.83 $321,542.12 $631,570.31 Q3 9.0629% $57,359.89 $120,045.72 $233,431.60 $429,717.73 Difference -2.2565% ($13,432.93) ($ 35,975.11) ($ 88,110.52) ($ 201,852.58) 2011 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 11.0573% $69,020.03 $151,137.06 $309,226.75 $602,488.89 Q3 8.3983% $54,094.82 $111,678.09 $213,866.13 $387,051.38 Difference -2.6590% ($14,925.21) ($ 39,458.97) ($ 95,360.62) ($ 215,437.51) 2012 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 11.3342% $70,894.80 $156,302.99 $322,256.82 $633,266.39 Q3 7.9611% $52,091.81 $106,622.44 $202,231.19 $362,100.92 Difference -3.3731% ($18,802.99) ($ 49,680.55) ($ 120,025.63) ($ 271,165.47) 2013 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 10.0768% $62,908.74 $134,612.77 $268,361.34 $507,942.33 Q3 6.1444% $44,837.55 $ 88,828.93 $162,473.94 $279,438.99 Difference -3.9324% ($18,071.19) ($ 45,783.84) ($ 105,887.40) ($ 228,503.34) 2014 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 4.3849% $39,170.40 $ 75,523.24 $134,060.28 $223,109.02 Q3 -0.0829% $27,668.78 $ 50,273.02 $ 83,687.16 $130,019.77 Difference -4.4678% ($11,501.62) ($ 25,250.22) ($ 50,373.12) ($ 93,089.45) 2015 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 -5.5230% $21,424.38 $ 37,624.45 $ 60,433.49 $ 90,530.88 Q3 -9.7270% $17,664.10 $ 30,381.94 $ 47,773.74 $ 70,100.49 Difference -4.4678% ($ 3,760.28) ($ 7,242.51) ($ 12,659.75) ($ 20,430.39) With apologies to the Las Vegas Convention and Visitor’s Authority for paraphrasing their slogan, What happens in the “Real World”, happens.

India- An Attractive Destination For Long-Term Growth

Summary India is poised for a robust economic recovery on the backdrop of strong fundamentals. Slowdown in China created ripple effects across emerging markets, but India looks like an attractive alternative. Narendra Modi government’s efforts on making India a manufacturing hub to catalyze economic recovery. For those who have been tracking the equity markets, last month has been quite a rollercoaster ride. The global sentiments remained weak with negative news flowing from China with respect to their economy. The Chinese economy grew by 7.4% in 2014, which is the slowest in 24 years. In an attempt to boost its exports and revive the economy, China announced a devaluation of its currency. This triggered panic selloff across markets. Emerging markets got the maximum impact. In an attempt to prevent the falling stock prices, the People’s Bank of China reduced its interest rates twice during the last couple of months. But, this failed to entice global investors and panic prevailed. The story in India looks quite different from its peers. The country is in a much stronger wicket compared to its peers. While the US Fed is mulling over increasing its interest rates, the Reserve Bank Of India (RBI) surprised the markets on 29th September with a 50 basis points (bps) cut in the repo rate. The rationale for the same is as follows. ( RBI’s Policy Statement ) Retail inflation has eased significantly to 3.66% in August 2015 as against 7.73% in the same month previous year. ( India’s Inflation ) The monsoon deficit in India has been around 14% this year. However, the central government has taken resolute steps towards managing food supply. Economic recovery has been slower than expected. This rate cut, combined with the 75 bps rate cut done during this year by the central bank is expected to bring down the cost of borrowing. This can encourage fresh borrowing and can propel capital expansion. For companies that already have significant debt on their books, their interest cost is expected to come down, thereby increasing profit margins. On the backdrop of a slowing Chinese economy, global commodity prices have been low. While this may be a negative for countries exporting commodities, it is a huge positive for India as it is an importer and consumer of commodities. India imports close to 80% of its oil requirements. Crude oil prices have fallen sharply over the last one year, and this will have a huge positive impact on the current account of India. It is evident that an economic recovery is underway. The RBI has also stated this clearly in its monetary policy review on 29th September 2015. It has been 15 months since the Narendra Modi government has taken charge and the fundamentals look robust. The Make in India Campaign – With the government encouraging foreign companies to set up their factories in India, this campaign will definitely boost manufacturing, construction, power, infrastructure, technology and logistics sectors. The government is striving hard to make it easier to do business in India. This can definitely attract more foreign funds to the country. While earnings growth was subdued in the previous quarter, it is expected to be robust. With the domestic demand picking up and global economy recovering (healthier data from US and Europe), earnings are expected to improve over the next 3 to 5 years. Softer commodity prices is a huge positive as it will result in improving margins and increased profitability. China has been witnessing increase in the cost of labour and real estate. In comparison, India looks like an attractive alternative for companies to move into. Considering these factors, Indian equities definitely look attractive as an investment destination. In this light, an evaluation of The India Fund, Inc (NYSE: IFN ) is given below. Fund Investment Objective: The fund’s investment objective is long-term capital appreciation, which it seeks to achieve by investing primarily in the equity securities of Indian companies. Investment Philosophy: Bottom-up stock selection Proprietary research driven Based on fundamental analysis Factsheet Download Performance: As on 31st August 2015 The fund has a well-established track record of over 20 years. As it is evident from the past performance, the NAV has beaten the MSCI India Index over the short-term and the long-term. This superior performance can be attributed to a) Superior stock selection of the fund; and b) Fund manager’s ability to manage sector-wise weightings effectively. Top 10 Holdings: As on 31st August 2015 Sector Allocation: As on 31st August 2015 The portfolio consists of fundamentally strong companies that would be benefited as the economic recovery happens in India. The top 10 holdings constitute 58% of the portfolio. The portfolio is diversified across 9 sectors and has a balance between both cyclical and defensive companies. The fund has highest weighting to financial services. With the central bank cutting the repo rate by 50 bps and the outlook for interest rates moving southwards in the next 12 to 18 months, financial services are expected to play a key role in economic recovery of the country. Information Technology and Consumer Staples have a weighting of around 17.5% each to the portfolio. Information Technology plays an important role in the exports of the country. With the US Dollar strengthening against the INR, these companies can be benefited due to increased US Dollar revenues. The Consumer Staples companies in the portfolio, especially ITC, Hindustan Unilever and Godrej Consumer Products have very low debt, well-established brands and a strong hold in the Indian consumer market. The other key sectors that are expected to contribute to the fund’s performance are Healthcare and Industrials. Healthcare has a weighting of 10.1%. Growth is expected to come from both the domestic markets and exports. Industrials have a weighting of 5.3%. This sector will be benefited significantly as the Make in India campaign becomes a reality and as manufacturing activity improves. The cash level in the portfolio is just 1%. As it is a closed-ended fund, it need not maintain high cash levels to fund redemption requests as they are not allowed. As on 1st October 2015, the closing price of the fund was $24.27 while the NAV of the fund was $27.54. It is currently trading at a discount of 11.87%. IFN data by YCharts Forward Looking Estimates The RBI, in its latest monetary policy review has projected a GDP growth of 7.4% for the year 2015-16. The International Monetary Fund (NYSE: IMF ) too has projected a GDP growth of 7.5% for the same period. This is higher than its estimate of China’s GDP growth which is 6.8%. With an inflation projection of around 5%, the portfolio companies are expected to deliver a robust 13-15% growth in earnings over the next 3 to 5 years. The fund also has a healthy track record of generating superior returns than the benchmark. Considering the robust macro-economic factors in India and with limited number of India-dedicated funds listed in the US, The India Fund, Inc fund looks attractive for long-term wealth creation. Fund Management Team: Asian Equity Team based in Singapore Net Assets: $824.1 million Expense Ratio: 1.47% Shares Outstanding: 29,541,212