Q: Could you start by giving us an overview of your investment style and investment philosophy?

A: My investing style developed out of a research project I undertook in 1981 when I was a graduate student at the Kellogg School of Northwestern University. I had a finance professor that challenged me to develop an investment approach that would beat the S&P 500. I accepted the challenge and developed a quantitative screening algorism that was based on publicly available company information. Since the goal was to beat the S&P 500, I figured that I should limit my portfolio to stocks from the S&P 500. The system worked, and it is basically the same investment style I use today.

The two overriding principles that guide my investment strategy are: a) don’t lose capital and b) earnings drive stock prices.

The first one comes from my experience in running a trust company where I gained an appreciation for client’s feelings regarding capital preservation. The second comes from the simple observation that when you filter out all the noise and look at market trends, it is earnings that drive the relative value of stocks.

Q: Where does your investment style fit between value and growth?

A: My screens look at return on sales, return on assets, etc. I am looking for the growth stocks that are likely to make the top 10% of the growth-stock universe. For the most part, they are large cap stocks, but sometimes a mid-cap will slip into the list. I also screen for cash flow and free cash flow, because if it is really a growth stock, the company should be generating a lot of cash. In the screening process, I also look carefully at earnings growth.

Q: Do you adhere strictly to a growth discipline?

A: When I started managing money in 1982, it was difficult to distinguish between value and growth. From the end of the seventies through the early eighties, the equity markets were just awful. Interest rates had been very high and the equity markets were highly volatile.

During that time I would select stocks like Proctor and Gamble, even though PG was not a growth stock. And, I would occasionally hold large cash positions.

Having managed other portfolio managers, I have had plenty of opportunity to observe how other professionals approach investing. Some believe that they should stick strictly to a specific investment style and remain fully invested.

I see no reason to remain invested when stocks are clearly in a secular bear market. I believe that it is much more important to conserve capital than to maintain strict adherence to a specific style.

For example, during the third quarter of 1998 and the third quarter of 1999, I lightened up. But by early October in both years I was again fully invested. When I sense that the markets are approaching a transition period, like the 2000 centennial or the war in 2003, I often increase my cash holdings.

By the end of 2000, the evidence was overwhelming that the markets were going into an extended downturn and that the end was nowhere in sight. So I lightened my portfolio during the 2001-2002 period and moved to higher cash levels. As a result, my performance relative to the S&P was greatly enhanced.

However in 2003, I remained neutral too long and missed the second quarter turn. A similar thing happened during the 2000 bear market. I had a bad fourth quarter, but after adjusting, my performance improved.

While many of my clients appreciate my approach, some intermediaries do not. That is because they want to make the asset allocation decision and would prefer to see me 100% invested at all times. But that is just not my style.

Even though I sometimes move in and out of the market, I don’t consider myself a market timer. I am more of a transition player.

Q: Would you describe your stock selection process?

A: I guess you can say I am a bottoms-up stock picker. My quantitative screens help me reduce 500 stocks down to 40 or 50, to what I call my select universe. On that select universe I apply my subjective analysis. Although I could run the portfolio and use nothing but the quantitative screening, I have found that I can do much better by adding a subjective element to the process.

The quantitative process actually highlights sectors for me since it selects for certain characteristics like price and earnings momentum. And I tend to focus more on industries rather than sectors. It seems that my screening approach using seven different filters work fairly well in separating the good from the bad, as well as providing sufficient diversification.

On a three-year basis, we have been ranked by Effron as being in the top 1% of approximately 300 large-cap growth managers. That period covered two bear-market years, and one bull-market year. For April 2003, the first month Effron ranked us, we were the top, large-cap growth manager for the 1, 2, 3, 4, and 5 year periods.

Q: How do you select specific stocks for your portfolio?