Q: What’s the underlying investment philosophy of the fund?

A: The basic philosophy is to invest in businesses that serve a basic human need that has existed from the beginning of time and will go on forever. We believe that the strategy of buying companies that satisfy those needs provides a consistent return with low risks and beats the market averages over time.

We buy securities related to things that people need to have or to human nature activities. For example, industries like housing have been around forever because people need to have a shelter. Such as stock is Ryland Group, one of the leading home builders. Also, people need to dress themselves and to have shoes, so we own Nike and Wolverine World Wide.

This is an all-cap strategy fund and we’re allowed to buy any market cap in any market, so we can be foreign or domestic and up to 15% bonds.

Q: The notion ‘necessity’ varies around the world. For example, cable TV may be considered a necessity in the US but not in most other countries. How do you reconcile that?

A: In such cases I would stick to basic requirements. But our definition also includes stocks like Wrigley’s and Hershey, for example, because I myself have tried to stop eating chocolate unsuccessfully and we consider that a basic need.

I also invest in insurance stocks because I believe that people’s tolerance for risk is important. We are investing up to 22% of the total account in the financial services industry. Our largest holding is First Cash Financial Services, the pawn store broker. They provide basic lending services to a population group that typically is not good with money or doesn’t have banking accounts.

In our capitalist system people can trade their time in for cash. You exchange your labor for cash, use that cash, deposit in the bank, pay out your credit cards, buy some goods and services, or save it. So I consider financial services to be a basic requirement of any society that’s beyond barter trading. Any civilization with a currency system needs that service.

Q: Do you also invest in healthcare or health insurance stocks?

A: No. We’re low in both technology and pharmaceuticals because patents expire, there are a lot of changes going on, and it is too technical for me. In addition, there’s a lot of competition in that area and the level of lawsuits is beyond the average. In the hospital industry, the profits are poor, the return on equity and free cash flow yields are low.

Other industries that we invest in include the food, tobacco, and gaming industries. Altria, parent of Philip Morris is one of our largest holdings and we also own Boyd Gaming. We believe that gambling has been around forever and will be here when you and I are gone. Entertainment has always been a part of life.

We also own Makita Corporation because they are a great company. The tools have been around forever, ever since we learned to make a spear. Human beings have always used tools to get something done and that’s why I think that toolmaking companies will be here forever.

Q: What about the overseas competition from China in that market?

A: We follow the management teams of the companies we own so we watch their execution. Yes, there is international competition. Some of those companies have operations in geographical areas with better price basis per hour for labor so they are able to move their facilities to gain margins. I’m not too worried about Makita because they’ve got a great track record of competing.

Q: How do you translate this philosophy into an investment strategy and process?

A: We look in various research publications such as Value Line, the Securities Research Company Chart Books, and the industry booklets. We also use Multex for individual company reports from brokerage firms. We read the 10Ks and the 10Qs to decide if a company meets our criteria for strength of the balance sheet, cash flow, and quality of earnings. We also look at management teams and all the fundamental factors to decide if the odds are in favor of being successful if we buy the stock for our shareholders.

Once we buy the stock, we follow their business, how they trade throughout the day, and any news that is being released. Every Monday morning we have a formal investment meeting to discuss new and old ideas.

Q: Do you mainly rely on a fundamental approach or you combine it with evaluation of the technical aspects?

A: We use the technical aspects as indicators for buying new positions or adding to old ones. For example, the week before Labor Day has been one of the worst weeks of the year and September is one of the worst months on average for the last 50 years. That’s a technical statement so we anticipate a weak week and a weak month and we take advantage of buying opportunities.

We also take the relative strength information and check why a stock is underperforming relative to the benchmark. In other words, we take the fundamental data and compare it to the technical data and use it to buy stock at better prices.