A: Sometimes we'd get out of a group because everybody has piled in and we're running out of available buyers. One of the greatest risks in energy right now is the enormous hedge fund exposure. That doesn’t mean it has to go down a lot, but it means that, historically, it’s been hard to make money in such sectors.

We would also sell a stock if it gets too expensive. For example, I cut back Apple in December, even though I believe that it's a truly revolutionary company with incredible execution and opportunities going forward. However, it was getting too expensive, over-believed and overhyped. Every stock has corrections and expensive stocks have expensive corrections, so I have been hedging stocks.

Q:  Regarding your buy discipline, do you wait for a catalyst or you buy in anticipation?

A: We’re looking for big, monolithic moves so it is not vital to catch it at the bottom. Also, we always sell going in the top – or what we think is the top. Often you wait to see that growth has changed or that a big driver has changed. It varies.

Q:  How often do you replace the holdings?

A: The market goes through cycles and we often end up with fairly high turnover because growth stocks tend to go up three-to-one to the market, but they also tend to go down a like amount. When we get nervous, we raise cash and create turnover. However, even when the turnover is more than 100%, we don't turn over the entire portfolio. Usually, we turn over a quarter of the portfolio a couple of times, and we don't touch 25% to 50% of the portfolio.

Q:  Would you describe your research process?

A: We’re always looking at new things and market leadership to see if something is going on. Every quarter we go through the earnings of 1,000 companies to see if some of them jumped out of the box with big earnings. We may find out that it wasn’t just one, but four other companies in the industry, so something must be going on.

From a research standpoint, the beauty of our portfolio is that we don't constantly work on industries where we don’t have major investments. With only six or seven investment professionals, we focus on the ones we own or plan to own. I’m spending no time on the banks and thrifts and very little time on commodities because I don’t want to own them right now.

Everybody in our office is focused on our concentrated portfolio, as opposed to our competitors where they’ve got 45 analysts and are covering 115 categories, even though they only care about 10 of them.

We have a highly concentrated process, focused on four to six themes. It might be 25 to 40 stocks, with each theme representing 10% to 25% of the portfolio. Obviously, if the theme doesn’t work, though, it’s a bigger problem for us.

Q:  What major risks do you perceive? How do you measure, monitor, and control them?

A: There are specific risks with stocks selection, and we manage that on the idea that if it’s our best pick and the multiples are reasonable, we’ll keep owning it. If the multiples expand too much, we will let them go, because when the multiples are too high, the risks are too high. If we trun cautious on the markets, we'll take money out of everything on the idea that in a bad market, all stocks will go down.

Q:  Do you worry about issues like corporate fraud? How do you protect yourself from huge blow ups?

A: There are things that you cannot control, and corporate fraud is one of them. I have to assume that the companies will do the right thing, but if you start to get nervous, just sell the stock. One of the reasons we haven’t owned any of the public education companies, like Apollo and Career Education, is because I’m suspicious of their corporate practices, not only at the macro, but also at the micro level.

I believe that a category can grow by 15% for a long time, but when companies grow for five or six years at a huge rate, something “funny” might be happening. It is not necessarily illegal, but something like pushing revenue recognition, etc. As it gets harder and harder to grow sales each year, people are bound to push things a little further, and a little further.