Q:  What are the core beliefs that guide your investment process? What message do you want to convey to investors through the word “opportunity” in the fund name? A : We’re looking for stocks that sell at levels that are not ordinary. Any investment that we make has to fall into one of three analytical categories. They are free cash flow relative to the stock price, net asset value relative to the price, and a potential catalyst. Overall, we look for companies that generate excess cash flow, trade under their net asset value, or have a discernible catalyst that could fuel the stock price. We do not look for companies of a particular market cap size, but most of the companies that qualify for the portfolio tend to be small or micro-cap companies. The concentration in small-cap companies is a by-product of our discipline, not a rule. Of course, there are exceptions. For example, diversified media properties operator Gannett Co Inc used to be a large-cap company, now it is the mid-cap range, but it was a small-cap company when we first bought it. Gannett has been in the portfolio for almost a year, because it fits the category of free cash-to-price. At one point, the stock was selling at 1.5 times the free cash flow, which is extremely rare in the investment world. So, this is not a small-cap, a mid-cap, or a large-cap fund. It’s not necessarily a value fund, although it may look like a small-cap value fund. We have several companies in the portfolio that would never qualify as value stocks. So, the word “opportunity” suggests that we invest when we find the opportunity in a company that meets our standards. Q:  Why have you chosen those categories for your investment strategy? Could you give us more details on each of them? A : The free cash flow criterion is pretty straightforward. Essentially, it is the amount of net cash generated over a one-year period, relative to the market price of the company. With the second criteria, we try to find companies that trade below their net current asset value, or NCAV which is the current assets less all the liabilities. This approach is based on Ben Graham’s theory, which he promoted back in the 1940s. According to his theory, a stock that trades at about 80% of the NCAV is a good buy. In our portfolio, we have securities that we actually bought as low as 20% of the NCAV. In the third area, we look for a catalyst that can propel the stock price to higher levels. We focus on companies in liquidation and, after digging into their balance sheets, cash flows, and after talking to the managements, we determine the value for the investor at the end of the liquidation period. Then we compare the value relative to the stock price to determine if it will provide a good return over this period. There is a fourth aspect of our strategy, which more or less confirms the other three aspects - insider activity. The insiders tend to be value buyers of small and micro cap companies. They are not large buyers of big or growth companies. So, insider buying activity is a good confirming indicator to our stock selection. In some circumstances, insider buying can be a reason to take a position in a stock, but only if we are sure that the insiders have a good reason for buying. Q:  You mentioned buying Gannett at 1.5 times the free cash flow. In your experience, what could drive stock prices to such low levels? A : In those cases, usually the future prospects for the company are not at all wonderful. You should only consider them if they have a fairly stable outlook going forward. Typically, the companies that trade at seven or eight times the free cash represent a good deal. It is quite unusual when companies fall below those levels, so Gannett is an exception. Q:  Is that low multiple related to the pessimistic market perception of media companies? A : Yes. That is why you have to make some determination about the stability of the free cash going forward. In the case of Gannett, even if the cash flow continued to decline, the company could still pay back every dollar of your investment over 18 months and end up with the same current balance sheet. So, a multiple of 1.5 times the cash flow is an unusual number. Theoretically, if a security is selling that low, it has to be going out of business very shortly. And that just was not the case with Gannett. Q:  What would trigger your sell decision in such cases? A : The prospect of Gannett in the last six to nine months really hasn’t changed, although there might have been a sense that more stability is coming to the newspaper business. Generally, we would sell the stock when the multiple approaches 10 times the free cash, but it depends on how we view the future at that point. We would have to re-evaluate. Q:  What are the analytical steps of your research process? How do you review the investment landscape? A : An investment has to fall into one of the categories that I described. We screen for each category and, once we come up with a list of potential investments, we begin to analyze each company. Then we narrow that list down to one good idea, and we start the process over again. It takes work, but there could be a constant flow of investment ideas. It is a slower process that one might imagine. We were fully invested when the market was at its absolute low in March, because so many companies began to fit our requirements. Right now, we have a cash position of about 35% of the assets, because as the companies have appreciated, they no longer fall in our categories. We didn’t make a market decision to end up with cash; the current cash position is the result of the decisions on each individual security. So, the process of getting that money back in equities will take some time. Assuming that the market levels out here, it will be a process of coming up with our ideas and beginning to absorb this cash again. If the market continues to go up, we might end up with even more cash. Overall, we don’t try to predict or evaluate the market from a top down perspective. We have a very fundamental, bottom-up approach. Q:  Could you give us more examples of specific stock picks? A : Gannett was an example of our first analytical category - free cash flow relative to price. An example of the NCAV category would be Candela Corporation. We bought the stock at 20% of its NCAV, for $0.40 to $0.50 a share. It was burning some cash, but at a very slow rate. It would be seven or eight years before they would have run out of cash. So, we were not worried when we had a chance to buy the stock at such a fabulous price. Because of its price, we expected Candela to become an acquisition target and to be integrated in the operations of a larger company. That could eliminate a substantial part of the overhead and turn the cash burn into profit. In the case of liquidation over a one-year period, we expected a value of $2.50 per share, so it represented a good buy. Now, there is an acquisition offer for $3 a share by another company. Q:  What would you do if a stock price continues to fall after the purchase? A : If we have done our homework, all we need is patience. Q:  Every investor can make a wrong decision. What’s your strategy in the cases when you acknowledge that you have made a mistake? A : Every company is different and it depends on the thought process. When trying to “correct” a mistake, you can make a bigger mistake by pulling the trigger too soon. Overall, it depends on whether the reasons for buying the company are still there. If the reasons no longer apply, if fraud is being discovered, if there is an unexpected loss or a lawsuit, we would sell the stock. Sometimes you can't get out, and it gets a lot cheaper, so you might look again at a lower level. When you make mistakes, you try to deal with them in the best possible way. And I wouldn’t even call that a mistake. Rather, it is dealing with a dynamic environment, where anything can happen. A company could get sued for patent infringement and lose everything it has. Sometimes you just can't anticipate everything and that’s key in the investment business. Q:  What is your portfolio construction process in terms of diversification, asset allocations and benchmarks? How do you build your positions? A : We're a diversified and non-leveraged fund. That's an important differentiator, because most of the funds that have done well this year are non-diversified and leveraged, or just the opposite. We did extremely well, despite being diversified and non-leveraged. Typically, we have 25 to 30 companies in the portfolio with average position size of about 4%. We add to positions gradually, starting with one-third of a position. We have a systematic approach, but there is no other magic to it. Buying the first position may be done within the first day, but if the company is very small, it can take longer. Then we proceed to dig deeper and to determine when to make the second purchase. We may decide not to add to a position if it moves up. So, we are not aggressive buyers, while many managers buy their entire position over a few days and not care if they pay 5% or 10% more due to appreciation. Q:  What’s your view on the risks in the market? How do you try to control or mitigate them? A : The key risk control is embedded in our analytical process. It is a risk-averse process by nature, where the elements of risk decline through the selection process. When you buy a company at 20% of its NCAV, the amount of risk is greatly reduced. That’s a very different approach from buying growth companies that are developing new technologies or face strong competition. In our case, the risk is an unforeseen event, such as a lawsuit for example, or anything that changes the profile of the company. So, we reduce the risk through the process itself. Let’s take the example of Gannett, which was selected through our free cash flow model. How much risk is there when the company can return your entire investment within 18 months out of its cash flow? One of the negative effects of this risk-averse process, however, is that it takes longer to invest the cash and we are not fully invested at all times. As the market got blown apart, our success in finding companies increased dramatically, based on the standards that we have. It was lot easier to build the portfolio up, and we were 100% invested by March. Q:  So, when the markets are down, you have plenty of investment opportunities, and when the markets are booming, the opportunities are few. How do you resolve this issue? Is holding cash the only solution to that issue? A : We don’t aim to stay in cash; we really try to find companies that qualify. We might rely more heavily on insider activity and the relative value of the companies. We may buy companies with NCAV of 80% with insider activity, while in declining markets we may have better investment options with companies trading at 20% of the NCAV. So, yes, the level of the market impacts our decisions to some extent, but our process is rigorous enough. In booming markets, we tend to have more sales than buys, and vice versa. Logically, you'd like to buy low and sell high, and that strategy comes naturally from our analytical work. Overall, I believe that our process provides a good way to take the emotional aspect out of investing, which is extremely important for mutual fund managers. Fund managers become emotionally involved when the markets are going up. They invest just because they feel they need to participate, and not because their analytical process guided them. We try to avoid the emotional bias because, in the long run, it leads to average performance.