Q:  Could you provide some examples of stock picks that illustrate your process?

A: Enron Corporation would be a good example of our sell discipline. The company peaked at around $77 a share and we owned it along the way up. Then the stock started to fall and we sold it at around $56. Meanwhile, most of the major brokerage houses continued to call it a value ‘buy,’ even when the stock reached $28. We sold it at $56 not because we knew about the problems of the company or the future events, but because of our discipline and because it had become weak relative to the market.

In March/April 2007, we started selling off all the financial stocks because they had become relatively weak. If we had stayed in the financial stocks, our performance would be much worse than it is now. We had also owned many REITs and housing stocks, which were very strong all the way until the end of 2006, when we began selling them.

Q:  How do you approach portfolio construction? Which index are you benchmarked against?

A: We have a diversified portfolio, which typically consists of 20 stocks. We measure the volatility of our universe every week and when it picks up, we’ll move up to 25 stocks. If the volatility is at a very high level, we’ll move up to 30 stocks. Currently, there are 24 stocks in the portfolio.

We start with equal allocation in those stocks and, as they perform, the winners will become heavier because of their performance, and the losers will become relatively smaller until we sell them. To minimize the individual stock risk, we have limited our maximum stock position to 5% at the time of purchase. Also, the exposure to any industry group is limited to 20%. Since we manage a growth fund, we allow a maximum of 35% of the money to be invested in high beta stocks.

In terms of benchmarks, we measure ourselves against the S&P 500. Our universe consists of all the S&P 500 stocks and about 300 of the S&P 400 stocks. It also includes 150 stocks that are in neither of those indexes. Those additional stocks represent industries that are not covered, or just stocks that we consider interesting. Nevertheless, the bulk of our selection comes from the S&P 500 index.

Q:  What risks do you perceive and how do you control them?

A: Risk management, as well as our entire investment process, is based on our consistent sell and buy discipline. The key element is that we get out of the stocks before they become big losers. We do not believe in market timing or in building up large amounts of cash in the portfolio. We try to stay with the stocks that we believe will do better than the markets. Since this is a growth portfolio, it can be a little bit more volatile on the downside but, historically, we have done pretty well in bear markets as well.

One of our rules related to risk control is that we reduce the positions when they reach 10% of the portfolio. Another element is that we stay out of the sectors that we believe are going to underperform. We believe that the way to make money is to make bets on sectors and stocks, but we are quantitative, technically oriented, and disciplined in that respect. With a minimum of 20 holdings, I believe that we also have adequate diversification to eliminate systemic risk.