Q: The 'DOG' inside the fund symbol automatically tells me the investment style is based on the “Dogs of the Dow” theory made famous by Michael O'Higgins. A: Correct. The total return fund acts and looks as if 75% of the assets are in the Dogs of the Dow and 25% are in one-year T-Bills. Q: Total assets under management are $20 million. All mutual funds have expenses. Is the expense ratio very high? A: They are high, but they're coming down. What we ended up doing is going to our custodial administrator and saying, 'Let’s go straight across the board on all our assets as to what the costs of the funds would be.' Q: Then how does the total return fund work for shareholders? A: There are two different rules and regulations you have to follow within the securities industry. You have the SEC and then you also have the IRS. What the SEC says is a mutual fund cannot put more than 5% of their assets into any one company. What you don't want to do is run into a problem with the IRS and have the mutual fund taxed as a corporation and then taxed on the individual basis. What we do on the total return fund is the SEC says the mutual cannot have any more than 5% of their assets in any one company – not net assets. So, essentially what we do is when the money comes in, we put 75% of the money into the 10 highest yield Dow Jones stocks or 7.5% into each position. And the other 25% goes into one-year T-Bills. At 7.5%, we're over the 5% limit. Simultaneously, we borrow money and buy T-Bills and it gets us back to a 75-25 balance. We earn interest on the T-Bills we buy and we pay interest on the loan we received. The difference between those two, what we earn and what we receive is about 15 basis points, about $15,000 for every $10 million borrowed. So, it's inconsequential. What it does is it makes it act as if 75% of the money is in the Dogs of the Dow and 25% is in T-Bills. That's as close as you're going to get within the rules and regulations to appear as a pure, opened-ended, no-load, Dogs of the Dow fund. Q: What additional aspects of these rules and regulations apply to the fund? A: What is really interesting is that if you look at the expense ratio of the total return fund. It's over 2%. People say, 'That's just ridiculous.' What you have to consider is the rules and regulations. The SEC makes us take the interest cost as part of the expense ratio and does not give us credit for the interest we earn. Although it looks high, in reality it is not that high. It would be a whole lot easier if the IRS and the SEC saIdent, 'That's okay, you can just invest in the 10 highest yielding Dow stocks.' But they won't do that. Q: O'Higgins' theory worked during the roaring 1990s by outperforming the Dow Jones Industrial Average, but large-cap stocks in general have seen tough times the past three years. A: Let’s look back in time. I remember 1998, 1999, and the beginning of 2000 were very difficult years for us, the reason being was that people were taking money from us, and saying they didn't understand what was going on. This is the new economy; the old economy is dead. As much as I tried to tell people that without Exxon and General Motors, you're not going to get to work. Without DuPont, you're not going to have the plastic to build these computers. Without International Paper, you're not going to have the boxes to ship them in, or the paper coming out of your printer. Everybody just lost sight of that. Companies in that time frame, believe or not, actually had products, customers, revenues, earnings, dividends, and were all thrown out the window. That did not make any sense to have a company that had those attributes. The idea in that time frame was we'll just buy companies that have no products, no customers, no revenues, no earnings, no dividends, and no nothing. And we'll make a ton of money. March 2000 started to hit and they started to go south. During that same time, if you look at 1998, there was approximately $22 billion in unit investment trusts utilizing the Dogs of the Dow investment theory. Today, there is virtually nothing in those unit investment trusts because the brokers and the clients weren't making the returns of 30% to 70%. So why would you want to have those kind of companies? So they sold them all off. Q: It was definitely a drastic change in investor sentiment. A: I can remember when Exxon reported $17 billion net after tax and the stock went down. The logic still goes forward. You look at our total return this year. Although they haven't performed all that well, but even net after a high expense ratio, our total return is 11.07%. Q: Is it going to work in the future? A: The reason I say yes is if you get out today and just buy the 10 highest yielding Dow Jones stocks in equal dollar amounts, those stocks will produce a yield of 4.23%. I'm not an analyst and I'm not an economist, but if I look at these companies and I compare that to a U.S. government treasury note that is going to pay you anywhere from 2.5% to 3.5%, where do you think you're going to have more money at the end of five years? Q: If you re-invest the dividends into those 10 stocks, you would actually deliver a compounded return of greater than 5%. A: And the capital appreciation. Add into it the new tax situation, which is going to be taxed at 15% the next thing you know is you have one heck of an investment strategy. Q: Are people buying now for the dividend, plus the incentive from the new dividend tax legislation? A: Look at what is happening out there in the whole big picture about corporations paying dividends. There are two thoughts about paying dividends. One thought is if you have nothing better to do with your money than to pay dividends. Then you should just close up your doors and go home. You have no more growth potential. The other side of the theory is if you pay dividends over the long-term, you're going to have a better rate of return. I'm of the philosophy that if I'm going to invest in something, an income producing property, for instance, don't you want rent coming of it? Q: When I look at the Dow stocks outside of the technology components, they've been around for decades. General Electric has been in business for more than 100 years. A: You also have to look at the likelihood of these companies going broke. What's the likelihood? Let’s say you buy the 10 highest yielding Dow Jones stocks and one of them goes broke. How much money do you lose? You would lose 10% of your investment, right? Assume that two of them went bankrupt over night; you would lose 20% of your money, correct? I would argue, no, you would probably lose all your money, because these companies are so large, they employ hundreds of thousands of people. There are hundreds of thousands of people that supply these major corporations. And those people would be out of work. No one is going to pay their mortgage. The bank is going to end up foreclosing on the houses. They're going to get the houses back, but who are they going to sell them to? It's a ripple effect. These companies are large, cash flow producing companies, and I don’t see over the long haul how you can go wrong. Q: There is an argument put forth now that they should be raising their dividends because the shareholders won't have to pay tax on that positive free cash. A: I think what you are going to see are these companies and a lot more companies are going to start to pay dividends. We don't need all this money in retained earnings. You can pay it out to the shareholder. Plenty will still have a portion of cash and cash to grow the company. Q: Do you still think that a company like Caterpillar, a deep cyclical, can continue to grow during each upturn in the business cycle? A: I can't tell you what a company is going to do or not. All I do know is the real world. I remember in the 1990s the classic example of Woolworth. Q: Woolworth used to be a component of the Dow Jones Industrial Average. A: It was one of the highest yielding. I remember having to buy Woolworth at 25 and 26, knowing full well that they were going to cut their dividend because they were losing money. It was just a terrible situation. Everybody on the Street knew it. But I could not go away from the formula. So I stuck and had to continue to buy it. Then I sold it out at $15 or $16, although it killed me. That's not a real smart move for a money manager. Q: I understand you rebalance this fund once a year. A: Correct. What is interesting about that lesson is we were buying a whole lot more of Union Carbide at $16 and $17 a share than we were of Woolworth. When we sold Union Carbide out, we sold at $35 and $36. Although we lost money on Woolworth, we made a lot of money on Union Carbide and that averaged it all out. And that's why you stick with the system. Nobody liked Union Carbide at the time. Q: Carbide was eventually acquired by Dow Chemical. A: Nobody wanted to buy Philip Morris when it was at $19 or $20 a share. That's why our system works. Every one of our funds, as you know, including total return and balanced, are highly disciplined and non-emotional. What you see is what you get. There is no quarterly window dressing that goes on. There is no style drift. It's plain and simple. Q: The other two funds you manage also invest according to a systemized theme that only rebalances annually. A: That's been our success. While everybody got caught up in the dot-com mania, we could not. We were losing assets to tech and Internet funds and everybody saIdent, 'You don't know what you're doing.' Then 2000 came and it's a whole different ball game. Then you compared our returns. The idea to investing – and our company philosophy – is it's not what you make on the upside; it's what you don't lose on the downside. We've been able to do that for our shareholders. Some statistics I've read state that some people are back to the same amount of money that they had in 1996 and 1997. We just continually grow little by little. Q: As money comes into the fund throughout the year, how do you allocate it into the stocks? A: We have anywhere from 15 to 25 different portfolios. We'll have a portfolio, say, on January 1, and then we have another portfolio on January 15. All these individual portfolios are held for one year and then adjusted. You really have in our funds a rolling Dogs of the Dow and a rolling T-Bill. When new money comes in, we allocate it to whatever portfolio is coming due. We're always buying the 10 highest yielding stocks for that individual portfolio.