A: We look for companies that are not only undervalued and but also have superior returns on invested capital. Buying at a large discount to fair value means the stocks don’t have as much downside risk as the overall stock market. We also look for stocks that will withstand a recession better due to major demographic, legislative or technological tail winds. This won’t completely avoid risk, of course, but it does tend to reduce it to some degree.

Energy Conversion Devices (ENER) is another company and sector we believe is recession-proof. The demand for energy will keep rising, and solar energy will find a growing market in tough economic climates. The healthcare sector is another, because aging Baby Boomers and new medical technologies are expected to drive an increasing need in developed economies.

Q:  How do you see the risk and what do you do to control it?

A: A widespread belief among individual investors and Wall Street is that risk and returns are correlated, although research shows that isn’t strictly true. In a pure stock fund with ultra low investment risk, the risk is that you are not going to outrun the broad indexes in a strong market environment. We are normally fully invested in the market, and while our methodology won’t protect us from normal market volatility, it should tend to minimize investment risk if investors don’t allow themselves to be driven out by short term panics. We should do better in poor stock markets, which should reduce overall volatility throughout an entire market cycle.