Page 29

Portfolio Management


During times of excesses, we concentrate on reducing risk by holding particularly strong companies. Ed Wachenheim, 2.29.08

One of the key ways we manage risk is by buying securities for which there are minimal expectations. If expectations are minimal or no one is paying attention, short-term volatility can be muted. This is really just another way of saying it’s prudent to buy securities with value characteristics. Carlo Cannell, 6.30.08

looking for some huge transformation in a company’s business. Christopher Grisanti, 10.31.07

By focusing on stocks we know very well, with a high level of tangible downside protection, we’ve so far captured more than the market return in up markets and only 15% of the market’s loss in down markets. For value investors, that’s kind of what it’s all about. Atticus Lowe, 4.30.07

We think our way of investing lowers risk dramatically. If you invest only in quality businesses that generally aren’t exposed to external shocks – like union actions or a lot of cyclicality – that are growing 810% per year and earning 10% current returns, you don’t ever really dig yourself any big holes. Jeffrey Ubben, 1.31.06

Not to be flip, but all we count on in a number of our investments is just for things to return to normal. There’s a lot less risk in wanting that to happen than Winter 2008

We do cap a given industry’s exposure at 25% of the portfolio, which is a check on the innate lack of humility we often have as investment managers. Owning five or six positions in an industry is a good, strong bet, but also isn’t betting the house on how smart we are relative to everyone else. Jeffrey Bronchick, 1.31.08

We’ll have no more than 30% in any one sector, which is meant to insure that we won’t follow a very strong sector as it grows in importance in an index. Kevin McCreesh, 10.31.07

We’ve found that the best way to deal with the fact that market sentiment can change so quickly is to try to own absurdly cheap things. Stephen Roseman, 9.28.07

In periods of rapid change in liquidity and economic conditions, the odds that we’re simply wrong about our estimates of companies’ near-term fundamentals are higher than average. As a result, we’re more focused today than ever on maintaining flexibility – through cash levels and buying power – and in sizing our bets according to the medium- to lower-confidence environment we’re in. We’re not necessarily making fewer bets, but they’re smaller in size. Larry Robbins, 12.21.07

million birthday parties for his third wife at company expense. Other investors like the leverage that having debt gives you on the upside, but we generally try to look down before we look up – leverage doesn’t look so great from that perspective. James Clarke, 10.31.06

We like it when expectations are very low and we have a contrarian view on a broader issue impacting the company. Low expectations help limit the downside and can result in prices that leave you paying nothing for the upside if good things happen. As Joel Greenblatt, who is one of my oldest friends, always says, “If you don't lose money, most of the remaining alternatives are good ones!” Jeffrey Schwarz, 5.30.08

To some extent, balance sheet risk is a character issue for us. The CEO whose company has a great balance sheet probably isn’t going to make the big, dumb acquisition that will kill the company. He’s probably not the guy throwing $2

Investing is often about knowing your strengths and we've learned that we're better at spotting profitable, unglamourous, under-valued companies than we are at identifying traditional turnarounds – by which I mean money-losing companies we expect to get back into the black. As a result, we set a guideline for ourselves that no more than 10% of the portfolio will be in companies with negative trailing 12-month earnings. John Dorfman, 10.31.08

We don’t benchmark at all. I don’t care if we own almost no financials and I don’t care if we own an excess amount of energy. We’ll go where we think the value is and let the weightings fall where they may. Steven Romick, 7.31.08

We spend 12 months building a position, are actively engaged with management over the next 12 months and if it all works out, we’re exiting after another 12 Value Investor Insight 29

Words of Investing Wisdom  

Greatest Hits” collection of investing insight from Value Investor Insight

Words of Investing Wisdom  

Greatest Hits” collection of investing insight from Value Investor Insight