We are a deep-value manager employing a strict bottom-up approach. We invest in stocks of out-of-favor companies selling at discounts to tangible book value. We look for companies in the bottom decile of price-to-tangible book ratios and a positive outlook for earnings potential over the next 2-4 years. Studies have shown, and our superior record confirms them, that this universe of stocks substantially outperforms over extended cycles. A study was conducted in cooperation with Compustat from 1951 – 2001. It showed that stocks in the lowest price-to-tangible book decile delivered the highest returns over the long term. The lowest decile delivered 16.5% return versus 12.2% for the S&P 500. Our intensive research tries to determine which of these low price/ tangible book stocks will turn around and achieve their earnings potential.

We initially screen about 10,000 companies from various databases including Value Line, Capital IQ and Bloomberg. Those that meet our strict valuation criteria are added to our proprietary Watch List for further analysis. This list of low price/tangible book value stocks contains about 300 names. From this list we choose the most attractive 30-50 names after completing our in-depth research. Our in-depth research includes time spent reading company documents and speaking/meeting with company management.

Stocks are sold when they appreciate rapidly, if a better idea is found, or if fundamentals deteriorate. We do not have an implicit stop-loss discipline. As a stock goes down, it becomes a better value to us. We would conduct further research and typically buy more stock at lower prices.

Above all, we are concerned with absolute risk. We define risk as loss of principal. We are less focused on standard deviation or R². We try to control risk by buying stocks at deep discounts to tangible book value and asset value.

Our intense balance sheet analysis and focus on asset quality helps to limit the downside risk. Because we concentrate our universe on the lowest decile of stocks based on price/tangible book value, we can devote our resources to a concentrated universe. We, therefore, feel that we know this universe extremely well – better than our competitors – and this also limits risk.