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Fools,

I'm going to share some addition details about how the Inside Value team determined the three groupings for our final guidance report. This should have been laid out more clearly and thoroughly in the report. I'm sorry that it wasn't, but we hope to rectify that now.

The first group is our "high-conviction long-term hold list." Let's call this "Group A."

These are the businesses (and stocks) that we think will continue to compound their intrinsic values and provide you with long-term market beating returns.

These are high-quality businesses run by high-quality management teams. Many have been multiple recs. All have at least one source of sustainable competitive advantage and many have multiple sources of overlapping moats. Many share similar financial attributes including healthy balance sheets, high returns on invested capital (ROIC) and free cash flow (FCF), organic growth, recurring revenue, and pricing power. All of them have growth opportunities and several of them have growth powered by long-term tailwinds. These are the businesses and management teams that we admire most, trust our capital to, and love to learn from in our investing journey.

This list has nothing to do with valuation because we don’t think any of them are unreasonably expensive (to justify selling) and we think the values of these businesses will grow at a high-enough rate and long enough to justify owning them for a very long time (10 years or longer).

The second group we'll call "Group B." We titled this group "Companies You Can Hold For the Next Few Years." In truth, we could have come up with a better title because "few" is vague and not very helpful to you.

But, group B is populated with good businesses that are undervalued with acceptable risk levels. Every single one of the companies on this list is trading at a discount to our estimate of fair value (with an acceptable margin of safety) and all of them but Copa and Time Warner are a "medium" or lower risk level. Even once (hopefully) they are trading at fair value, we wouldn’t be in any rush to sell. But they didn’t make our high-conviction long-term hold list (Group A) because we were less sure of their prospects ten years out or longer.

The third group we'll call "Group C." We called this group "Companies We Would Consider Selling" because we are less excited about their long-term prospects. If I didn't like the title to Group B, I really don't like the title to Group C, but we had difficulty coming up with a better alternative. The reason I personally don't love the title is because we didn't make it clear enough that you should only "CONSIDER" selling if that is something you want to do (if you want to pare back your portfolio or raise cash for any reason). There has been research done at Stock Advisor showing that its stellar returns would have been even better had the Motley Fool never sold any of the stocks on the scorecard. So, the decision to actually sell, we're leaving up to you based on your own personal circumstances. Companies made this list for a variety of reasons including...

1. They are trading at or above our estimate of fair value.
2. We are less sure of their long-term prospects for profitable growth and compounding value.
3. Perhaps they serially disappoint, have deteriorating moats, and/or continue to underperform our expectations.
4.Perhaps we'd rather choose to partner with another management team.
5. Or maybe it's a lousy business that we wouldn't consider investing in today. (We've refined our processes and checks and focus on quality above all else now).
6. Finally, perhaps we just deem it a company that needs constant monitoring, but we will no longer be providing that monitoring to you at Inside Value through ongoing earnings/maintenance coverage and valuation updates (guidance changes).

We hope this helps.

We truly believe that Market Pass is the best solution we can offer our members going forward, and your value team (led by Rich and supported by John and Philip) will still be working together to recommend Market Pass members our favorite value ideas each month.

We hope everyone has an awesome weekend.

Fool on and thank you.

John
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