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Rapidan Capital, LLC

Registered Investment Advisor

510 Thornall Street

Edison, NJ 08837

732.632.8854

FIRST QUARTER 2009INVESTOR LETTER

April 29, 2009

Dear Investor and Friends,

The separately managed accounts called the Value-Aligned Folios lost -8.6% for

the 1st quarter, moving ahead of the S&P 5001, which lost -11.0%, by +2.5% for the

year.2

Marchs gain of+8.8% in the S&P 500 index has been followed with an April gain of

+9.5%! (As of April 29th), and the S&P 500 is now down -3.1% on the year.

The Value-Aligned Folios gained over +8.0% for April and are now just about flat

on the year. While it is extremely pleasant for us to report to you that we have

gained on the market and other investors so far in 2009, we know that like most

investors we are still nursing steep losses over the last 18 months.3

While a loss never feels good, we're very pleased to have done relatively better than

many of our most admired competitors. Although we do not and cannot know

whether this recent move up in stock prices is the beginning of a new bull market or

just another bear market rally, you can be sure we our positioning to take

advantage of the inevitable recovery.

STOCK MARKET REVIEW

Today is the 100th day of President Barack Obamas already historic administration.

I waited until today to write a quarterly review letter because I wanted to make

sure that we would get a complete picture of the beginning of the year since the

rally that started on March 9th went right on through April.

In some ways, it seems like the stock market has been a walk through hell, and as

Sir Winston Churchill once said, If youre going through hell, keep going. So we

keep going. We keep going through hell until the day when your humble money

manager can define the new normal. Were not there yet though.

On March 9, the S&P 500 closed at a new panic low of 676.53.

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In doing so, it completed a 17-month decline (on a closing basis) of very nearly -57%

from its all-time high on October 9, 2007. This was the greatest decline of the post-

WWII period.

On a pure price basis, this decline wiped out all the appreciation in the

American equity market since 1996. (Adding back dividends, the destruction"only" canceled out 11 years rather than 13.) And 2008 was the worst calendar year

for stocks since 1931.

Our business and government leaders and all of us everyday citizens are trying to

get through the same perfect storm. And today we got another reminder that we

still have a way to go. It turns out that first-quarter GDP fell another -6.1% which

is on top of the -6.3% decline in the last quarter of 2008.

After a brutal 2008 and with economic activity plunging, the S&P 500 index

dropped another -8.4% in January and then another -10.7% in February. And yes

as we all remember the market was down another -8.0% by the close on March 9th,

less than two weeks into the last month of the quarter. (I say we all remember

because I spoke to most of you on or around that day to help make the big decision

that often determines long-term investing success to get in or stay in, or run for

cover in a panic.) It was not easy but it was gratifying that all of you stayed in and

agreed to try to save more to put more in stocks around here.

In the near-term we have been rewarded, and it probably marks the beginning of

double digit annual returns for 3 - 5 years to come. Ill have more on that a bit

later.

The first quarter of 2009 ended with a glimmer of hope that the worst is over for the

stock market, as the S&P 500 Index rallied +17.9% from its bear market low set on

March 9, 2009. For the month of March, the S&P 500 actually gained +8.8%,

making it the third best March on record. However, it was not enough to save

the quarter, as the S&P 500 lost -11.0% for the first three months of 2009.

Most of the first quarter records for the S&P 500 Index were set for abysmal

performance:

Januarys loss of-8.4% was the worst January ever. Februarys loss of-10.7% was the second worst February ever. The first two months cumulative loss of-18.2% was the worst ever. The first quarter loss of-11.0% was the worst since 1939. The first quarter produced the sixth consecutive quarterly loss, resulting in a

cumulative loss of-45.8%. The last time stocks fell for six quarters in a row

was 1970.

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WHAT DROVE THE MARKET?

Many factors drove the market lower during the first quarter. Fourth quarter 2008

corporate earnings, reported in January and February, were much weaker than

expected, as analysts had not yet caught up with the rapid deceleration of the

economy. In addition, many companies were forced to slash their dividends andsuspend buybacks to conserve cash.

The economy continued to deteriorate with most experts revising their forecasts

downward for all of 2009 and into 2010. The Obama administrations budget, which

called for increased spending and a huge deficit, was poorly received by the

financial markets. And while the global financial system was no longer on the

brink of collapse (we were told), the repeated injection of capital into major financial

firms raised the question of bank nationalization as the ultimate solution to the

financial crisis. At its low point, the S&P Financial Sector Index had fallen -84%

from its February 2007 peak.

In its initial efforts to get its budget and stimulus package passed, the Obama

administration warned of another Great Depression, an undefined catastrophe

where Americans lose their homes en masse, jobs disappear faster and faster and

the biggest banks go bust. All will be OK though, if, and only if, the Presidents

aggressive spending actions were approved. Dont you feel better now?

The message scared the heck out of Americans and investors everywhere. A

CNN/Opinion Research survey released in March indicated that 45% of Americans

believed that the U.S. will in fact enter another Great Depression within the next

year! Stock market investors were spooked because it was clear that the scaretactics of the administration raised the prospects for historic deficit government

spending and greater government involvement in the economy and of course

higher taxes on 100% of the people, not just taxpayers.

THE DOW GIVES UP 12YEARS OF PERFORMANCE BELIEVE IT OR NOT A

POSITIVE INDICATOR

On March 2, 2009 the Dow Jones Industrial Average closed at 6763, its lowest level

since February 5, 1997. According to JP Morgan Chase, this marked only the third

time since the index was created in 1896 that the Dow had retraced 12 years of

performance. The other two times signified a close proximity to a market bottom.

The first occurred on April 8, 1932, approximately three months before the marketbottomed. The second instance was on December 6, 1974, this time marking the

exact day that the market bottomed. This bear market reached its low point on

March 9, 2009 at 6547. Hopefully, this indicator works again and we will not see a

new bear market low. The Dow closed the quarter at 7609. It is at 8100 today.

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The chart above presents rolling 10 year returns (excluding dividends) for the S&P

500 (SPY) going back to the Great Depression era. The past ten years have beenone of the worst in historyranking in the 1st percentile the very

bottom! The silver lining in this data is that 10 years of negative annual stock

market returns have invariably produced attractive returns over the subsequent ten

years. That means we should save as much we can and invest it in stocks now. We

dont try to pick bottoms. But to ignore a rational decision that has little risk and a

historically large expected payoff, like investing in the stocks of Great Companies

now, simply because they might get cheaper, maybe, someday, doesnt make

rational sense emotional sense yes, but we need to ignore the gut on this one and

think with the head.

We value stocks of Great Companies. Thats not as difficult as picking the bottom the exact moment when stocks wont go any lower. Plus, other investors are frozen

by their current position right now. We are taking advantage of their fear.

For the past dozen years or so the US broad stock market was a wild roller-coaster

ride. The Dow Jones Industrial Average and the S&P 500 index went up and down

(and in the process set all-time highs and multi-year lows), stagnated, and traded in

a tight range. At some point during the ride, index investors and buy and hold

stock collectors will realize that their portfolios arent showing much of a return,

just like many of us realized in January.

Over very long stretches, stocks, on average, have returned around +7% annually.

(You used to hear investors cite average long-term returns of about +10% for the

broad market, but the recent bear market has depressed that figure.) But in any

given year, or even over several years, the stock market can diverge markedly from

its long-term average. Throughout the prosperous 1990s, for instance, the S&P 500

Index rose +13% per year.

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No wonder that S&P 500 index funds were widely touted as can't miss investments;

mutual company managers were made out to be geniuses worthy of multi-million

dollar salaries; and brokers, financial planners and trust officers grew like weeds

while taking larger and larger fees from the amazing run in the 1990s. But the

1990s turned out to be the exception, not the rule.

The past decade hasn't been so kind, however. Through March 2009, the S&P 500's

annualized 10-year return was negative -3%. It's been a wild ride along the way,

too. After soaring in the late 1990s, the index slumped more than -40% in the

March 2000 to October 2002 bear market and then rallied steadily before faltering

from late 2007 through early March 2009 more than -55%.

LESSONS TO BE LEARNED FROM THEVOLATILITY &LOSSES

Lesson One: Buy and Hold without Active Management is Dead

We always espouse the importance of thinking long term if you're a stock marketinvestor. But if "long term" means to you 5 or even 10 years, it is not long enough.

Stocks may have earned around 7%-10% a year, but that's usually when measured

over 20 or 30 year periods. Obviously, if you're younger and saving for your

retirement, your time horizon is probably long enough to have most of your

investment portfolio in stocks. (Given longer life expectancies, even the not-quite-as-

young should have plenty of stock exposure too.) If your financial goals are short- or

intermediate-term in nature, it's not a sure thing that Buy and Hold and Hold

(Hang) On works anymore.

Lesson Two: You Only Learn in Bear Markets

Psychologists Carol Tavris and Elliot Aronson in the 1950s described themotivational power of what they termed as "cognitive dissonance".

The engine that drives self-justification, the energy that produces the

need to justify our actions and decisions - especially the wrong ones - is

an unpleasant feeling called 'cognitive dissonance'. It is a state of

tension that occurs whenever a person holds two cognitions (ideas,

attitudes, beliefs, opinions) that are psychologically inconsistent, such

as 'smoking is a dumb thing to do because it could kill me' and 'I smoke

two packs a day'. Dissonance produces mental discomfort, ranging

from minor pangs to deep anguish; people don't rest easy until theyfind a way to reduce it.

The last 7 months have provoked much cognitive dissonance in all of us. What's

more mentally painful than believing that you think you know what you are doing

in the stock market or in picking advisors while being smacked with evidence to the

contrary day after day after day?

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We have resolved that we have two choices: we can rationalize it away, absolving

ourselves of the responsibility for the pain because of the "circumstances beyond our

control".

Or, more productive and lucrative is to learn from recent history to make us better

investors. This is tricky because the recent market environment has been sounusual. Or has it?

One value investor was pragmatic in explaining his strategy change. He said, "One

needs to be a learning machine and be willing to give up some of one's best-loved

ideas when the evidence suggests they are flawed."

Evidence suggested that our Value-Aligned Investing process needed refinement.

Nothing was sacred during our review. We even questioned whether our method for

choosing our watch list of Value-Aligned companies was flawed. (Hint: it wasnt.)

Senior corporate executives are still too often paid to worry about things other than

creating shareowner value. And too many are paid to take on too much debt and

take too many operational risks because the bad consequences of those decisions are

suffered by others, not them.

Lesson Three: Buy Stocks When Others Are Afraid Lowest Cost Wins

It's true that you would've been better off putting money under your mattress than

into the S&P 500 over the past decade. But most people usually don't put all the

cash they'll ever have to save in the stock market at once.

We learned that there are two types of markets investing markets when watchinga great portfolio go up over time is the best idea and trading markets when buying

at lower discounts than normal in larger amounts and then selling before stocks

reach fair value is a strategy that works in these range-bound markets.

And despite the tax consequences of taking gains, the after-tax return of this

strategy should be much greater than buy and hoping. Thats called active value

investing and it takes into consideration the less talked about topic of when to sell a

stock.

Using shorts and listed derivatives to hedge makes it easier to lock in economic

gains and even profit in a down market, but thats not the point. The point is tolearn to buy and especially to sell within your normal long-term time horizons when

risk increases.

WHATWE CHANGED

First, when buying undervalued shares of Value-Aligned companies we learned

that we needed to adjust our initial position sizes better. Actual short-term

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volatility was leading to negative feedback loops causing liquidity drains on some of

our favorite positions. This meant that if we had positions that were too big for its

volatility, the market robbed us of our flexibility to have enough capital (or

conviction) to purchase larger shares of those fine mis-priced companies from

panicked or otherwise motivated sellers.

After all, this crisis was a collateral crisis, where assets were liquidated as those

assets held for collateral lost value. Fortunately, (by design) our bottoms-up

balance sheet orientation led us to owning only the best credits. If those stocks

were being sold, we should have been in there buying from those investors that

were forced to sell to satisfy their margin loan calls or alleviate their mental

anguish. We could not do that in every instance until we tweaked our process at the

end of last year.

Our position limits used to be 6% of invested capital at cost on the long side. This

policy was derived from our historical batting average plus our +15% per year

return objective. We would shoot for an average gain on 10 core positions of+30%giving us a +18% return on just that capital.

We figured that we would bat around 50% (a coin toss between winners and losers

throughout the year on the remaining 40% of the capital) as we traded in and out of

positions, all the while doing research to add to our conviction to get those positions

to the maximum position size of 6%. -15% was the maximum loss on these

positions, so if we lost -15% on 50% of the remaining 40% we would have about a

-3% expected loss to subtract from the +18% earned on the core to get to our +15%

target. Why +15%? Because thats what it takes to double our money over 5

years.

That was the old. Now new position sizes are somewhere between 2 - 6% maximum

depending upon liquidity, driven by short-term volatility. The more short-term

volatility a stock exhibits, the smaller the position size will be at cost. This still

leaves enough room for more volatile stocks to contribute to the +18% return of the

60% core while limiting the damage caused by unexpected liquidity vacuums. The

consequence is that we will have more than 10 (usually) core positions because the

average maximum position size will be less than 6%.

Second, we concluded that we needed to pay more attention to macro considerations

in individual stock selection and overall portfolio positioning.

Like many traditional value investors, we have traditionally left macroeconomic or

political forecasting to the pundits and focused almost exclusively on individual,

bottom-up stock selection. When we found undervalued stocks that had great

earnings power and sustainable returns we built a portfolio around those. Themes

would usually emerge from the bottoms-up analysis; we did not usually first look for

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and find macro or political themes and then search for the stocks that fit those

themes.

Early last year, however, the mortgage crisis was nowhere near over and as it

worsened, large segments of the US financial industry faced big trouble. But

because or bottoms-up process led us to own only one financial firm, a specialtyinsurance company, and in fact, led us to recommend selling Fannie Mae (FNM),

Freddie Mac (FRE), American International Group (AIG) among others, at high

prices before their collapses, it prevented us from understanding just how

widespread the damage of the mortgage meltdown would become.

Our mistake, then, was missing the extent of the damage in the financials during

September and October, and how that panic would affect our real world companies.

We thought a company such as bookseller Borders (BGP), for example, trading at

only 4.5x earnings before interest, taxes, depreciation and amortization (EBITDA)

was cheap enough and that its business was resilient enough that the stock would

do well regardless of the macro environment.

What we've learned in the past year is, first, that the earnings of very few

companies are immune to a terrible economy; second, even if earnings hold up, the

multiple that investors are willing to pay probably will not. On much reduced

earnings, Borders traded at just 3.2x EBITDA at the beginning of the 1st quarter.

(BGP is up +180% in April by the way.)

Another way our macro view is affecting how we manage our portfolio is that we

will almost certainly be quicker to take profits on winning positions (as mentioned

above).

Historically, we would try to buy 70-cent dollars and sell 120-cent dollars but today

those numbers are more likely to be buying 50-cent dollars and selling 90-cent

dollars. This is not a market to be holding out for the last dollar of value.

If it sounds as if were hedging, we are. The range of potential outcomes - for the

economy and for individual companies - is as wide today as weve seen it in our lives

and those older than us say the same thing. Most of the near certainties are gone.

MAKING MONEY IN RANGE-BOUND MARKETS

We took aggressive rebalancing actions at the bottom in November and despite setbacks in early March, we added to the best positions in what we thought would be

the best sectors. The result was that we earned more than+14%against the

market.

We went from trailing the S&P 500 by over -6% to outperforming by over +8%.

Many investors overlook the importance of the sizing of positions, but its the most

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important contributor to continued success. The ideas in which you have the most

conviction are the ones that lead your weightings. Correct sizing also allows you to

BUY low and SELL high because conviction and independent thought allows you to

buy more when stocks are sold by short-term traders and sell when things look good

for everyone.

BUY and HOLD, the stock strategy for most investors in the 90s, worked brilliantly

through the period of investment history where the stock market was in a trending

bull market. Recent research, however, suggests that over the last 150 years stocks

are in trending bull markets less than 40% of the time.

What happens during the rest of the other 60%+? We get

range-bound markets, according Vitaliy N. Katsenelson.

Whats that? He says, The most vivid analogy is to a roller

coaster. After all the excitement of dramatic up, down,

sideways, and pin-your-back-to-your-seat-thrill-ride gyrations,

no matter how long the ride lasts, you (and your portfolio) end

up back where you started. This is the fate of the inactive

value investor, the buy-and-hold and passive index investor during range-bound

markets - close to zero stock returns plus meager dividends, with time having

passed but little progress toward retirement nest-egg goals.

It turns out that when we look at market history we notice that human behavior

just does not change that much. Therefore, we often get cycles that repeat. And its

funny, but markets go up when we have inflation and markets go down when we

have inflation. Markets go up in periods of economic stagnation and they also go

down in periods of economic decline. And the same thing happens with interestrates. So what determines subsequent annual returns when investing in the stock

market or in a particular stock?

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VALUATIONDETERMINES SUBSEQUENT RETURNS

At the end of a prolonged bull market like we had from 1982 to somewhere around

2000 maybe all the way to 2007, the average valuation as measured by the price

that investors paid for current and future earnings goes to the top of the historical

range. It gets the most expensive. That 17 year, 3 month bull market that the

graph above shows ending in January of 2000, produced very high price to earnings

(P/E) ratios (high valuations). You can tell in the bottom of the graph above for

anybody that bought in at that highest valuations, their subsequent returns have

been decidedly negative.

And one of the most difficult things for all portfolio managers over the last 7 or 8

years has been the remarkable increase in the profitability of American companies

unaccompanied by the same type of rise in stock prices. The thesis, therefore, is

that the problem was that we started out at too high a valuation so the realized

returns from the beginning of this decade were bound to be very low.

1982 Today1974

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Hays Advisory has produced one of the more credible valuation measures. You can

see that graph above and you can also tell that buying stocks now has a high

probability of yielding well over double digit returns. At the 22% return that Hays

Advisory predicts, stocks will more than double in five years. But they wont get

there in a straight line. We are in a range bound market that calls for a more activevalue strategy.

We recognized this some time in October and November of 2008 and have been

employing that strategy ever since. Without getting into too much detail we have

explained to you that we have lowered the ranges in which we will buy and sell a

stock, sometimes selling the stock before it even reaches our estimate of fair value.

This updated approach calls for taking profits when youre at the top of the

valuation range and reentering stocks when they are near the bottom of the

valuation range.

We would be happy to discuss any aspect of the strategy that were using for our

funds and how we can apply it to separately managed accounts

Thank you very much for reading and as always we are here to help, to answer

questions and to do our best to educate you on the subject of corporate finance and

valuation.

Best regards,

David Lee Berkowitz

Notes:

1 The performance and volatility of the S&P 500 may be materially different from the individual

performance attained by a specific investor in the funds and managed accounts managed by Rapidan

Capital, LLC. In addition, the funds and managed accounts holdings may differ significantly from

the securities that comprise the S&P 500. The S&P 500 has not been selected to represent an

appropriate benchmark to compare an investors performance, but rather is disclosed to allow for

comparison of the investors performance to that of a well-known and widely recognized index. You

cannot invest directly in an index (although you can invest in an index fund that is designed to

closely track such index).

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2The quarterly returns as set forth in the first paragraph are estimates. Individual fundperformance, portfolio exposure and other data included herein may vary between the various funds

and managed accounts managed by Rapidan Capital, LLC. Performance results are based on the

NAV of fee paying investors only and are presented net of management fees, brokerage commissions,

administrative expenses and accrued performance allocation or incentive fees, if any, and include thereinvestment of all dividends, interest, and capital gains. While performance allocations are accrued

monthly, they are deducted from investor balances only annually or upon withdrawal. The

performance above represents fund-level returns, and is not an estimate of any specific investors

actual performance, which may be materially different from such performance depending on fee

arrangements, entry times into the Fund. All performance results are estimates and should not be

regarded as final until audited financial statements are issued.

3 Past performance is not necessarily indicative of future results. All investments involve risk

including the loss of principal. This document is confidential and may not be distributed without the

express written consent of Rapidan Capital LLC and does not constitute an offer to sell or the

solicitation of an offer to purchase any security or investment product. Any such offer or solicitation

may only be made by means of delivery of an approved confidential offering memorandum.