Corning has two other businesses that are important - fiber optic cable and related equipment and ceramic filters used in diesel engines for pollution control – but we believe that they are not accurately reflected in the stock price. In fact, they own 50 % of Dow Corning which is worth between $6 billion and $8 billion and if they were to ever spin that out or sell that stake and buy back stock, it would be a significant value-enhancing event for the company.

Q:  How do you go about constructing your portfolio?

A: At any point of time, we have a strict cap of just 22 companies in our portfolio. Mutual fund rules dictate that to be a diversified fund, we cannot go below 22 positions.

Therefore if you wanted to put say, IBM in the portfolio, you would have to make a case to sell something else and that too from the same sector or group. This is because, while creating it, we try to cut the portfolio on many different dimensions. So one is across industry where we won’t allow more than 25% to be in any one industry; the other is across valuation where we don’t want our portfolio to have huge multiples.

We divide the portfolio into three classes namely, those that grow 10% to 15%, those that grow 15% to 20% and those that grow 20% and up. We then try to have a balance among the three groups.

Q:  Why is this portfolio balancing important?

A: Balancing is essential because sometimes you’ll enter certain markets, like in the late 90s where it seemed right to invest heavily in high growth, high-multiple technology stocks because they were going up. Then came 2000 and 2001 where it all went bust in a very short time. We want to avoid such risks by ensuring that we have a portfolio that performs differently. We constantly monitor and try to ensure that we do not have all our eggs in one basket.

Our outlook is long term hence we are able to exploit the short-term wiggles in the market, especially if we believe that we’re in a good company with good management and a growing industry. Consequently, our portfolio turnover is closer to 30% or 35 % in a year.

Q:  What is your buy-sell discipline? How do you decide how long to let winners run and vice versa with your losses?

A: The winners are tackled on an individual and portfolio allocation basis. Take for example Citigroup (we do not own and have not owned it). Let’s say it started as a 4% position but in two years it has gone up 200%, thereby rising to a 12% position in the portfolio. We will never allow it to reach such a large position. We will cut down the position to 6%, the moment it reached 8 %, for that’s the most we allow in any one given name. We will cut it back every time it hit 8 %, meaning we would have cut it back 2% at a time.

Also, if current price hits what we had evaluated as its fair value, we would sell the entire position. Again this decision is made after reassessing our target price to confirm its accuracy or discover any substantial improvement in the company’s fortune.

Losses however, are tackled differently because we get very close to these companies and you have a lot of intellectual capital invested in the idea. However, since we have concentrated positions, losses can really detract from performance and so we are quick to sell.

Let’s take the real-world example of Comcast Corporation that we used to own. When Comcast went down 15% relative to its peer group, to remove bias, we reassigned its coverage from the original portfolio manager to another of our partners. That person had 24 hours to come up with an action plan and explain the decline in stock. The original analyst stayed on the committee as an information resource but had no vote on the outcome.

The committee in such cases, discusses the new person’s findings and decides whether we should take advantage of the decline and one, buy more, two, sell what we have, or third, just hold on to what we have. In the Comcast case, we felt we had underestimated its competition. They had also missed several milestones in terms of generations of free cash flow and so we elected to sell the stock.

Q:  What is the benchmark against which people measure your fund?

A: We are usually benchmarked against Russell 1,000 Growth index but we don’t really tie ourselves to it. So, whether it’s the S&P 500 or the Russell 1000 Growth we try over a period, to beat every index.

Q:  What is your view on risk? How do you manage risk?

A: We are risk averse. So we’re averse to market and systemic risks. We are willing to face corporate risk and others that we can analyze, because we’ve done the research. We can’t control what’s going on at CitiBank and whether or not they are going to have subprime problems. But we know that all of our companies don’t need the capital markets to hit their growth target and over time that’s important. Moreover, because we are sufficiently diversified across industry and evaluation class, we are able to weather short term storms.

Stock related risks are the kind we think we can control and manage. For example, we are prepared to take the risk over the fate of Apple Computer’s iPhone, because we think we can analyze that. We can see and buy the product, assess consumer demand, and monitor it on a regular basis. Whereas, it is impossible to gauge market reaction to say, subprime lending. We do not take risks that we do not understand or are not comfortable with or cannot analyze.

Q:  Can you give some examples to describe how you gain the confidence to take risk of a company’s one-product cycle in the forthcoming 5 to 10-year period.