Stocks

Stocks in our investment universe tend to have the following common traits: Experienced and capable leadership, a leading position in their respective industries, above-average prospects for earnings growth going forward, and strong financial metrics, including readily-identifiable assets, prudent use of debt, conservative revenue recognition practices, and free cash flow generation. We would like to buy these companies at a reasonable price to the market.

Our core "watch group" of businesses is supplemented by special situations that may allow investment in more highly valued companies that have a dominant position in their market, or particularly attractive companies classified as value stocks. In particular, the events of the last eighteen months have allowed us to initiate or add to positions in what we feel are some of the best companies in America when, due to the prospects of an extended recession and the events of September 11, they have been temporarily on sale.

Criteria that may be cause for selling a position include an unexpected change in company fundamentals or leadership.

Mutual funds

Mutual funds in our investment universe share the following traits: Superior management (in the case of actively-managed funds), a ten-to fifteen-year history of outperforming the broader market, and are tax- and expense- effective versus their peers. There are some great fund managers out there-guys and girls who are much smarter than we will ever be. In the case of some of our client portfolios, it's prudent and appropriate to let those professionals run with the ball.

Criteria for selling a mutual fund may include an unexpected personnel change among the fund's management, an undesired shift in investment style, or three years in a row of underperformance versus the broader market benchmark.