Q: What is your core investment philosophy?

A: Our core philosophy is to invest in great companies with good products that are well-managed by people with integrity. When we buy into a company, we are partnering with the people who run the company. We look at this in two ways. One, is it a business that we want to be in? And two, is it run by people whom we respect in terms of their business acumen and integrity? In terms of management, we look at how they treat their customers and employees and we want to know that they are competitive people with ethical conduct. We are growth-oriented investors and we pay a great deal of attention to valuation. The cornerstone of our investment discipline is to do valuation work that, when done correctly, mitigates risk in the portfolio. The key to success in long-term investing is avoiding major losses.

Q: What criteria are you looking for before making your investment decisions?

A: Our research process is very simple. Our flagship strategy is all cap growth, so we start with all of the roughly 15,000 publicly-traded companies in the U.S. We employ a proprietary quantitative screening process with approximately 15 criteria such as return on equity, cash flow yields and earnings growth. This process leaves us with a more manageable number of companies to analyze, usually a few hundred or so. We then look at these companies and tr y to answer three basic questions: 1. Is this a business that we want to be in? 2. Do we like this company’s position within their industry? 3. Are the right people running the company? There are several factors that influence our answer to the first question. Most important, though is that we want to invest in businesses with exceptional growth prospects. As far as the second question goes, we typically want to invest in ‘best in breed’ companies. And as for the final question, good companies can be poor investments because the wrong people are running the business. The investment landscape is littered with examples of companies that had inferior product but were run better and the stocks did great. The quality of management is very important to us. We try to meet with the management teams to assess their prowess and strategies. If somebody has all the answers, it’s kind of a turn off to us because in the real world nobody has all the answers.

After we answer the three questions, we spend a lot of time trying to decide whether or not we are paying an appropriate price for the prospects of the business in today’s dollars. We are looking at this on a time horizon of two to five years. We are also trying to discount the future growth back to today’s price and decide whether this is an attractive investment. We are looking at a company relative to its peers, relative to its own history, and relative to what we think the future growth prospects of that business are.

Q: Can you give an example of a company that matched your criteria?

A: We first purchased Intuitive Surgical in September of 2003 when the stock was around $17. We liked this company because we saw a process that was transforming the way things were done in their industry and had what we thought were excellent growth prospects.

The company developed and markets a robotic surgical machine, the Da Vinci. It’s a razor-blade type business where the company makes money selling the machine and then its parts, so there is a recurring revenue model at work.

We met with management, liked their approach to the business and felt that they had a good strategy to grow the business. They have done and continue to do an excellent job and we have been rewarded as investors. We continue to own the company, which is now $115.63, as of the close on 3/20/07, and plan to own it as long as they continue to deliver.

Q: How do you generally gather ideas?

A: We believe that the best investors share a genuine curiosity as to how things work. It is a general mindset or awareness as to what is happening in the world around you. When we travel and visit companies, we are building that knowledge base, which continually expands as time goes on. You get to know over time what works and what doesn’t work, so you can capture some of these major trends.

Let us give you an example. As the movement in energy prices started to take place, we began to research ideas and were generally having a difficult time finding reasonable valuations.

We generally like to invest in secular and not cyclical growth, but we were at a conference and listened to a presentation about what was happening to the demographics of the world, especially in places like India and China. We came away with a sense that the underdeveloped world has a large appetite for energy and that it would be important for companies to explore and find new sources of energy.

Not wanting to speculate on alternative energy sources, we decided that we wanted to find a way to take advantage without too much risk. So, we ended up buying Schlumberger, which services the companies that are in the exploration and production end of the oil industry.

Q: How is your research process organized?

A: The two of us are always engaged in the fundamental part of the process, trying to answer our three major questions. We are bottom-up managers, so we spend the majority of our time at the company level.

Q: How many holdings do you generally have in the portfolio?

A: The maximum number of companies we will own in any of our strategies is 40. We currently have 32 companies in All-Cap Growth.

Q: How helpful is it to know the companies well?

A: Knowing what is going on at the companies can help you make the most critical decisions. At some point, most companies encounter issues and we as money managers need to decipher whether the problems are short-term in nature and thus provide a buying opportunity or if they are more structural and are a signal to exit the position.