A: In the Guidant case, we had bought the company when it was at the $23 to $25 level. It was a full position, and over the eighteen or twenty-month hold period it traded from the $23 to $25 to the $50 to $55 level. It had become oversized. We scaled back on it a little. Even though we continued to like it, we did take some off the table into the strength simply because we didn’t want to have too oversized of a position in the portfolio. Then the entire position was sold when they were acquired at the $70 plus level.

In terms of things we’ve scaled back, a more recent one would be Merrill Lynch, a stock that we bought at the tail end of the research scandal, the Spitzer investigation, and the bear market of late 2002. We had bought Merrill Lynch in the sub-$40 level, a full position of 3% to 3.5%, and that stock has subsequently reached the $90 level, so it has been scaled back as it approaches fair value, and as it became oversized along the way.

Q:  How do you measure and mitigate risk?

A: We control risk through portfolio diversification, through industry and stock diversification, by buying strong balance sheets, and by buying at a discount to its Fair Value.

Prior to looking at the company on a valuation basis, we are looking at it from a balance sheet perspective. We will buy companies with real or perceived business problems. We don’t want one of those problems to be their balance sheet or financial risk. We are looking for companies with strong coverage ratios and very low debt so we don’t have to worry about the financials as they work through the problem.

The second part of the process is by buying a business at a well below market multiple, at a well below its historic multiple, and what we perceive to be well below its private market value multiple.

By buying a business at one-third below what we think it’s worth, we control the downside. If we were right that a business is worth $40 and we are buying it at $25, theoretically it should not go too much below that because it would become vulnerable to being acquired.

The third area of controlling risk is by buying no more than 4% at cost in any given company. We’ll buy no more than 15% at cost in any given industry.

Q:  Do you follow any benchmark?

A: We are benchmark aware, not benchmark driven. We pay attention to the overall economy and where businesses and sectors lie within the economy. Within benchmarks, we pay most attention to the S&P 500, and we are cognizant of which industries have the greatest and the least representation in the index.

We don’t build our portfolio by the industry concentrations or sectors. We do it on a bottom- up basis, but we don’t like to be wildly out of sync with the economy. Whereas we have a 22% position in technology, and the S&P 500 has a 16% position there, we are comfortable with that because technology is a meaningful part of the economy.

Q:  Most value investors are longer term holders. What is your time horizon?

A: Our time horizon is eighteen to thirty months on average. For every company, we have a fair value or target sale price, and we would like to buy that stock at one-third below that target sale price. If we can do that, you’d generally get 50% or more upside.

Our mindset in terms of timing is that upside could take as much as anywhere from twelve to thirty six months. Our longest held position for the advisor was American Express that we bought in 1990 at about $6 price. At the time we purchased it, our target price was about $15 per share. Ultimately, that target price went up from $15 to $60, and in 2000 the lines crossed in terms of stock price and targeted sale price as the stock traded above $60.

Q:  Does your research work help you in deciding when to sell a stock?

A: Yes, most definitely. Our decision to sell is very much related to our decision to buy a stock: in both cases, it is based on the relationship of the company’s business value to its stock price.

I said that ultimately we want to buy each of our holdings for at least one-third less than what we believe the business is worth. Conversely, we want to sell a stock when the stock price has risen to equal the updated business value of the company.

Happily, this is the outcome for the vast majority of our holdings. Of course, not everything works out as contemplated, and we certainly will sell stocks at a loss when we have lost confidence in management or the fundamentals of the business. However, the mere fact that a stock’s price declines will not trigger a sale. In fact, it might make buying more of the stock compelling.

Ultimately, our disciplined approach to selling has been a key component in our longterm success.

Q:  In a world of thousands of funds, what is the “value-added” advantage that the Matrix Advisors Value Fund offers?