Strategy

The funds seek to achieve superior long-term performance by acquiring equity securities of financially strong, well-managed companies run by capable managements at market prices significantly below our assessment of their business value. We sell stocks when they approach our appraisal. Equities purchased at prices substantially less than their intrinsic worth protect capital from significant permanent loss and also appreciate substantially once the market recognizes the company's economic value.

A company's market price generally must be 60% or less of our appraisal to qualify for investment. We appraise businesses by studying financial statements, regulatory information, trade publications, and other industry and corporate data, and by talking with corporate managements, competitors and suppliers.

We use two primary methods of appraisal. The first assesses the company's liquidation value based on the current economic worth of assets and liabilities. The second method determines the company's ongoing value based on its ability to generate free cash flow after required capital expenditures and working capital needs. We calculate the present value of the projected free cash flows plus a terminal value, using a conservative discount rate. Our appraisal should represent the price that rational, independent buyers and sellers would negotiate in an arm's length sale. We then check our appraisal against our database of comparable business transactions.

We generally sell a portfolio holding for one of four reasons:

1. The price reaches our appraisal and no margin of safety remains.
2. We can improve our risk/return profile substantially, e.g. we can replace a business selling at 80% of its worth with an equally attractive company at 40% of its value.
3. The future earnings power of the company becomes severely impaired by threats to the business, poor capital allocation, or other reasons.
4. We no longer believe management can build shareholder value and efforts to find new corporate leadership would be unsuccessful or too costly.

The Funds invest under the IRS diversification standard and we generally own 25 or fewer stocks in each portfolio. We hold concentrated portfolios for two main reasons. Concentration lowers our risk of losing capital because we limit the portfolios to our very best ideas, and we know the companies we own and their managements extremely well. Concentration also enables each company to have a meaningful impact on our results when the market recognizes value.

We are long-term owners, not traders or speculators. Our time horizon when purchasing a company is generally three to five years, which our historic portfolio turnover rate reflects. There are no limits on portfolio turnover, however, and we may sell portfolio holdings whenever we believe that sales would benefit shareholders.