Our stock selection process is centered on fundamental security analysis and emphasizes companies that are industry leaders or dominate certain niches. These companies generally have certain competitive advantages or franchises. Our favorite idea is a company that earns a superior return on its capital and that we believe has the potential to continue to earn superior returns over many years.

We prefer companies that are strong cash flow generators. Our focus is on companies that produce cash in excess of their capital spending and dividend payouts. This free cash can be utilized proactively on behalf of the shareholders. Possible applications include acquisitions, share repurchases, and increased dividends. Management should be skilled with respect to the allocation of the company's capital.

We take a close look at the management team, which should have an ethical approach to doing business, as well as an excellent track record. Management should display a commitment to the shareholders and own a meaningful long-term holding in their company's shares.

We typically seek to purchase stocks at a significant discount to what we judge to be their underlying, intrinsic value. We prefer to fill our portfolios with our favorite ideas purchased at low prices, but only under relatively rare conditions can we find so many marvelous opportunities. Thus our portfolios often contain shares of good companies along with shares of outstanding ones. We seek a greater discount to intrinsic value when a company does not fully meet all of our criteria.

Our efforts to determine underlying intrinsic value are eclectic and generally based on a combination of measures, including: current earnings power; cash flow; book value; assets; sum of the parts analysis; merger and acquisition pricing comparables; and other metrics common to the industry. Our cash reserves can expand when we are unable to find a sufficient number of our preferred companies at suitable prices. However, we do not attempt to time the market by making macro judgments about the economy or the market.