We think of risk as much more than volatility and attempt to examine all factors that could negatively impact the underlying business value of the companies in which we invest. There are significant risks present when investing in any equity, and we eliminate many stocks from our consideration that have risks exceeding our tolerance. When we do judge the risks to be acceptable, we require a margin of safety in the price we are willing to pay for an issue.

The concept of "margin of safety" was espoused by the late Benjamin Graham. It involves paying a price for a stock that is at a discount to underlying intrinsic business value. We are content to maintain significant cash reserves in our managed portfolios when we cannot find suitable issues at prices we believe reflect a margin of safety.

Our investment process focuses on companies that earn an attractive return on their capital. These companies generally boast strong balance sheets and enjoy strong cash flows. To the extent these qualities are present, various risks, such as those associated with illiquidity, are reduced. Depending on client objectives, our portfolios may contain a minor proportion of more aggressive ideas, including some companies with more leveraged balance sheets. In these situations, we seek a greater margin of safety in the price we pay for the stock.

We believe that proper risk management requires a reasonable degree of diversification. Our equity portfolios typically include 15 to 20 common stocks. While these issues are invested in a variety of industries, our approach does not preclude a concentration in industries with attractive attributes and an avoidance of industries plagued with difficulties. It also does not preclude an occasional concentration in an individual issue or two, but only when the concentration derives from appreciation and we continue to be positive on the company's long-term outlook.

While a reasonable degree of diversification is an objective, we believe that a focus on investing in good businesses at good prices controls risk more effectively than extremely broad asset or style diversification. We believe it is most important to understand the basic nature of each investment and the associated risks.