A: We employ a strict sell discipline in order to minimize loss and free capital for new, high-potential positions.

When we come to work, the first thing we want to watch is the stocks we own. We look at the news on every single company before the market opens. We do this with the help of a computer; we also read newspapers, cut earnings reports and dissect press releases. We’re checking our 200 stocks six times a day to see if there’s any reason we should sell any of them.

One stock that we sold was Schering- Plough Corp. (SGP). We decided to sell it after it reported a loss for the quarter and the year hurt by charges from its purchase of a biotech company. The quarterly results were better than the analysts had expected and the company’s shares rose but still we sold the stock as it no longer met our criteria.

Most money managers will find it more logical to hold onto a stock that has doubled as it might have further upside but we believe that it is better to sell because doubles are just so important. If you don’t take them, they can just evaporate because there is no guarantee that those gains will continue. However, our investment model permits repurchasing a stock later if it again meets the criteria and qualifies.

Q: Do you believe in stop losses?

A: No. We have a lot of stocks we buy and they just go straight down with no news and no reason. That doesn’t bother us at all. Stop losses just don’t make any sense if you like the stock, why you would allow yourself to be stopped out. In nine out of ten cases you’d sold a great stock just because the markets are volatile.

Q: How exactly do you calculate the price to earnings ratio with your proprietary formula?

A: I cannot disclose much detail because this is what we call ‘the secret sauce’ of our money management model.

Given our formula on the P/E ratio, basically we are going to forget about what happened in the past. The formula is not a fixed formula - it has pieces to it and the pieces can click in and click out. It’s very important how you do the valuation part of the equation.

Sometimes when we apply the formula all we have is the trailing earnings and the quarterly performance. If a company meets our valuation screen, given what we know and what we have to work with, it will obviously meet somebody else’s valuation screen too. We can see what is happening on the stock chart and this is without anybody recommending it as ‘buy’, ‘sell’ or ‘hold’.

We believe that every company, no matter how little it is, gets discovered when it starts doing well. It is going to get on somebody’s radar, and nine times out of ten when a stock is added to coverage, it’s added as a ‘buy’. You don’t pick it up unless you are excited. We do not target stocks that aren’t followed but we are not afraid of little companies that have no analyst covering it.

Q: What kinds of risk do you monitor and what do you to mitigate it?

A: We are not nervous about the stock market in general as we can’t control that. We worry about what we can control. We worry about company news and if we have some kind of fact that worries us, even though it could be our interpretation, we sell. We believe that in this way we avoid the big blow ups that can ruin a fund because the managers fall in love with the story.

Coca Cola, for example, is back at the same price it was ten years ago. People were smart when they bought it and for the first five years they were geniuses. Then, basically, they have tied up a large amount of capital for ten years in something that’s not making them any money. The stock is up a little or down a little and Coca Cola is not exhibiting the same qualities as it did 15 years ago. Obviously, they have fallen in love with the stock and they don’t have a very good sell discipline.

We miss a lot of the downside because we are out so fast but this is our number one risk control tool. You cannot eliminate the risk the minute you put your toe in the stock market, but you can reduce portfolio risk overall by having high minimum hurdles of profit and sales growth. Even in the best diversified fund, you are 90% at risk, if not 100%, because there is no guarantee Wall Street opens tomorrow. Stocks can go up violently and they can go down violently and investing in stock is inherently risky. As soon as you go out of a T-bill, a certificate of deposit or a money market fund, you are at risk.