Q:  Do you share the increasingly popular view that management meetings do not offer much value?

A : I find them useful because I want to know the character of the manager. It is true that you can find the information anywhere, but can you know the person? For example, when you meet someone with an autocratic approach, you know that this company is less likely to succeed. We like to meet the management in their office, on site. We don't care much about industry conferences because we prefer one-on-one discussions.

Q:  Can you give us some specific examples of companies that would fit your criteria?

A:. We look at a company’s ability to have excess cash flow to pay dividends or to do stock repurchases. We look at management succession, how they are viewed by the competitors. We look at absolute and relative valuation analysis and we monitor our investments continuously. Basically, we want companies that are very good at what they do. They are market leaders or are on their way to become market leaders.

Let's take Wrigley as an example. It is a great worldwide company, which constantly increases its dividend every year. They have solid and stable management. Stability and consistency are key words in our philosophy. Coca-Cola was such company for years, but then Pepsi became more of a leader and Coke is trying to come back as far as growth is concerned.

Q:  In such a situation, how do you recognize the signals? Three years from now Pepsi could be ahead of Coke by a significant margin.

A: Pepsi is not bigger than Coke, but they've been able to grow. A couple of years ago Coke was in the 50-dollar range and today it is $44, while Pepsi was in the $30s and now it is in the high $50s. Which stock would you prefer to own over this period? We first bought Pepsi in 1994.

There were trends you could spot three years ago. You could see where each of them was in the market place. Coke was having trouble with its distributors, Pepsi wasn't. Pepsi got into snacks, Coke didn't. Pepsi was looking into how the market was developing, while Coke was struggling. When Coke's stock fell into the low 40’s last year, we took a new look at it and decided it was worth buying.

When we buy a stock, we hang on to it until it is performing. It may be 2 years, 5 years, 10 years, or 15 years. It doesn't matter; we are here for the long haul.

Q:  Since dividends are important to your philosophy, would you consider a company like Pepsi three years ago if it doesn't pay dividends?

A: If a company is doing really well, it is probably generating a lot of cash flow they need for expansion. We are looking for companies with excess cash flow, so that they are able to pay dividend or buy back stock. We might occasionally buy a company before it pays its first dividend if we think it is coming up. Buying companies early, before others discover them, gives you the chance for a better ride.

Q:  When the trends you identified earlier die out, obviously you have to take the profits and exit. How do you decide when to sell?

A: We sell when the valuation is ahead of itself, which eventually always happens. If it doesn't, it just gives you a chance to buy more. If there are good stocks that are not moving, you just keep buying them. If we think that we bought it early, that is fine, we can hold it. If a stock is underperforming for some reason, we'll reconsider. If something has changed in the outlook, we are out of there immediately.

Q:  The yield in the bond market is driven by government estimates on inflation. Do you believe that inflation measures are accurate and comprehensive enough?

A: I don't think that the official inflation numbers are in line with what is happening today. If you go to your local restaurant or buy anything, you will see that prices are going up. Clothes are cheap because of imports from China, but food and service prices aren't going down. The measured inflation does not include the housing price inflation, which is going through the roof.

But even though real inflation may be higher than reported, there are ways to hedge yourself in the bond market. In junk bonds, I don't buy anything with less than 8% or 9% yield. If inflation is measured at 2%, while it is probably 4% or 5%, I am still getting 8% or 9%. I have a cushion and my bond maturity is less than 10 years.

Q:  Historically, which sector has been a big borrower and where have you been able to make money in the bond market?

A: Historically, the gaming market. The gaming companies had tremendous cash flows, they borrowed a lot of money to build all the casinos and they paid us all back. In the energy sector, some of the refiners had bonds we bought. We have also bought cable, food, drug companies bonds.

We will look at these companies for bonds but they wouldn't fit our criteria for stocks. The cable companies, for example, need a lot of money for capital expansion and aren't dividend payers. The sectors that fit our stock profile include some of the big banks, insurance companies, energy, food, technology, consumer products companies, some of the Wrigley type of companies, trust companies.

Q:  What kind of risk control measures do you have in place?