A: Well, what I do is rank the 50 stocks on my select universe and look for stocks that seem to have potential. If a stock in the top 50, drifts into the top 10, and stays there, it grabs my attention. The stocks in the portfolio are already ranked.

In balancing my portfolio, I decide what stocks are candidates for replacement. Then I look at potential selections and determine what impact each will have on diversification and industry weightings. My goal is to have at least 11 industries represented but prefer to have13-to-15. If you look just at my top 10 stocks, I would not be sufficiently diversified, so there is always a tradeoff to be made between diversification and performance.

It doesn’t bother me that my portfolio may consist of only 20 stocks. Some portfolio managers just couldn’t imagine doing that, but I have been doing it for 22 years. I would not, however, be comfortable holding just 6 to10 because that would not provide a safe level of diversification.

Q: How do you control risk?

A: As far as risk control, I follow a number of simple rules. For example, I do not have more than 20-25% of the portfolio invested in any one industry. Of course there are times like 1999 when it is pretty hard not to be over-weighted in technology since those were the stocks that were really moving.

I make sure that I am well diversified throughout the sectors. The S&P consists of 59 industries, and if I am represented in 20-25% of those industries, that is a reasonable degree of diversification.

Right now I am more heavily weighted in healthcare. I think that healthcare is an industry that will continue to grow. If you select the right stocks, you should be rewarded. During the recent correction, healthcare has been beaten down, but I am pretty optimistic about the future of the industry.

That is my approach and it has been substantiated by Milton Friedman’s analysis that suggested that if you had thirteen stocks in thirteen industries, you really are diversified. Most portfolio managers that have 40 to 50 stocks don’t agree with that, but everyone has a right to their own opinion.

Q: What are some examples of the stocks on your top-ten list?

A: A good example of a stock that I had for a long time is Dell Computer. It was a stock that had excellent growth and earnings path. Today, I think International Game Technology may follow a similar cycle. They are the market leader in the gaming equipment industry.

While that stock has been volatile lately, individual stocks have behaviors similar to the overall markets. They behave like a pendulum, and once they start to move they often take on a life of there own and continue in the same direction. Once they reach an extreme, they often become volatile.

I have been doing this since 1982 and what I have found is that I can find 4-5 winners, 3-4 dogs that I have to get rid of during the year. Then the rest of the stocks seem to hover around the S&P 500 performance.

I don’t follow analysts. When an analyst downgrades a stock, I look to see if it might be an opportunity to buy; alternatively, an analyst upgrade may be a reason to sell. What I look at is the reason for the change. If it is due to something the company announced, then I’m usually out. But if it is due to the analyst opinion, and my analysis would suggest continuing to hold the stock, I am more inclined to retain the stock and add it to my alert watch list.

In general, company statements are more likely to trigger a trade than the earnings numbers themselves. I am more interested in whether the business is continuing to grow on track and whether the momentum is still in place.

Q: With regard to Dell, what were two or three characteristics that made it attractive?

A: In general, I am looking for the momentum of compound earnings growth. I focus on both top-line growth and cash flow, because the company’s ability to support the growth is very important. Dell’s market share was an important factor, as well as their inventory management approach.

They did not believe in building inventory and letting it collect dust; instead, they would build on order. They are now doing the same thing in the server market and I think they will be successful. But the most attractive thing about Dell was their proven ability to grow their business.

Home Depot and Loews are two more good examples of companies that fit this mold. I owned both, but when it was clear that Loews was outperforming Home Depot, I sold Home Depot in favor of Loews.

Q: Why do you like Medtronic, it has been flat for a year?

A: Medtronic is a Minneapolis based company, so that I am more familiar with it than most of the stocks in my portfolio. I had not held this stock since 1988, but I added it to the portfolio again this year. In the late 1990’s they made a lot of acquisitions, but for various reasons, the company never made it through my screens again until this year.