Q:  What is your investment philosophy?

A: My investment philosophy is to maintain a diversified portfolio and measure it with risk adjusted returns. I do believe that slow and steady wins the race.

My philosophy in a nutshell is the old story about the tortoise and the hare. I do believe the people that follow the aggressive growth philosophy can do very well but I’d rather stick with a steady more predictable, low risk, and low volatility high quality companies. I think patience is a virtue and I believe if you stick with your investment philosophy through the different market cycles in the long term you can generate higher returns with less volatility.

I believe in the philosophy that says ‘Don’t speculate because you don’t need to.’ So we look for good quality stocks at value pricing. I’ve been managing money with this philosophy for a decade, and in the fund since 2005.

Q:  How does this philosophy translate into an investment strategy?

A: I use an approach to evaluate industries and sectors of the economy that are depressed or have fallen out of favor with investors. Then within each, I seek to find companies with solid financial strength and strong management that are selling below their intrinsic value. So from a fundamental basis it’s more like a bottomup strategy.

I strive to outperform the DJ Moderate Index first and then the S&P 500 index. I believe in asset allocation as it has been proven to account for over 90% of the returns within a portfolio. Asset allocation is also important because winning stocks of the prior year are not likely to outperform each and every year.

Q:  Could you give an example of such a company?

A: A good example is Johnson & Johnson. Year-to-date the stock has declined, but if you look at predictable earnings and fair value of the company over the last ten years and you look ahead, you will see the stock’s trading price to earnings ratio is below the mean.

I believe in the reversion to the mean philosophy. Stocks with predictable earnings and stable businesses may go in and out of favor but in the long run are likely to trade near their long term mean of price to earnings ratio. Based on history and future earnings, Johnson & Johnson is likely to trade between $66 and $75 nearterm. When it trades below $66, I add shares to my portfolio. At that price level there is a margin of safety and the stock is likely to generate as much as 8% return with very low risk.

Q:  How do you ascertain value?

A: I use a stock screener and I want the current price to be less than the 52-week high and below the historical mean (P/E). I have two different screeners. I look at historical price to earnings ratio, return on equity, dividend consistency, debt to equity, and current price to earnings ratios and from there I generate a list of companies for my watch list. I also tr y to view stocks on the predictable earnings measure.

Q:  Do you narrow your investment universe down and then do more research into the companies?

A: I look at both domestic and international companies. I narrow my universe down to approximately 25-30 names on each screen based on fundamental criteria. I use my contrarian screen and I am looking for total debt to equity of less than 0.5% and a consistent dividend yield. We also use multiple sources of information to cross reference various data points.

Q:  How many of these 25 names end up in the fund?

A: One or two. We probably have 36 stocks at the moment. We are fairly concentrated. Generally, I do not want to have more than 40 stocks at any one time. I do believe in giving higher weight to the top ten positions. For instance Johnson and Johnson and Microsoft are at 4% in the portfolio.

On my watch list at any given time there are probably 75 stocks. I constantly run my screens every day, and I add and delete stocks that have run too far or I just don’t see them as a value. It’s not to say that I wouldn’t go back to them.

Once I go through the screens I start reading all the SEC filings and earnings reports. I read the notes to the financial statements, I talk to management, I tr y to speak to people at different companies and gain insights in the business.

Q:  Could you illustrate your research process with an example?

A: We recently researched Toll Brothers because I’d like to find an entry point into a homebuilder. We tried to determine where Toll Brothers is going to be in one year, margin of safety at different levels, and how many units they are going to sell. What is their infrastructure like, what costs they need to cut and where are they heading in sales? I looked at the historical stock price and earnings.