Q:  Would you give us some background information about the fund family? A : We have a family of five mutual funds including the Nicholas Fund and the Nicholas Equity Income Fund, which I co-manage. The company was founded in 1967 and Nicholas Fund became publicly listed in 1969. Nicholas Fund has about $1.4 billion of assets under management whereas the Equity Income Fund currently has about $50 million. Q:  Could you talk about your philosophy of investment? A : Before the 1973-74 bear market Nicholas Fund was the number one ranked mutual fund in the country in 1971. We were riding pretty high and were taking way too much risk. So after this period we established our own investment philosophy that revolves around valuation, protecting the downside risk and invest in companies with long term potential. After the bear market of 73 our primary concern was to be very wary of the downside risk and control that by choosing and picking appropriate stocks. We are looking for stocks that are out of favor, stocks that are not well understood or well known or stocks that new to the marketplace or not widely followed. We are interested in stocks that trade with low earnings multiple and prefer companies that pay dividends. Above all, we are looking to protect our downside risks. We prefer smaller companies even though we are not averse to larger companies if they meet our stringent valuation and growth requirements. Basically we are not short-term traders but long time investors. With reference to growth we tend to buy growth companies rather than companies with cyclical earnings. We do buy stocks in cyclical sector under certain conditions to avoid another bear market trap. We buy stocks that are out of favor or misunderstood, or new plays in the market that are sold off for reasons which are temporary. We generally do not like to hold lot of cash in the fund and are fully invested. Holding cash requires market timing and making two decisions, when to sell and when to reenter the market and that is not easy to do on a consistent basis. In summary, this fund invests in high quality companies that meet our criteria of dividend yield that have a well known franchise or product have a track of record of rising cash flow and earnings and are trading at valuations below their long term growth potential. Q:  What made you reconsider your investment philosophy and why do you not hold cash positions? A : Prior to the bear market period of 73-74 we were such good performers that we took way too much risk by buying companies that did not have earnings. We were buying companies that had huge price to earnings ratios and had no dividend yield. The result was a downside risk which we could overcome with great difficulty. Q:  What is your investment and analysis process? A : Keeping in mind our investment philosophy we generally keep abreast of the market by our own reading, our thought processes and experience. We find that brokers and analyst have their own axe to grind and so their ideas and information is not of interest to us. We look at cash flow, we look at operating earnings but mainly we look at comparative valuation between the price to earnings ratio and the earnings growth rate. We do not mind paying as much as one times the growth rate to the price to earnings multiple. For example, we are willing to pay 20 times earnings for a company that is growing at 20% a year. While a company can claim to have such a growth we look only at historical earnings and not the future earnings. Expected earnings do give us an indication where the company’s performance is heading but we don’t rely on them for our evaluations. Even though we are multi-cap, we tend to favor the smaller companies. Q:  Could you give us a few examples? A : In the 70s and 80s we purchased stocks of FlightSafety International Inc, the world’s largest flight training school which was later purchased by Warren Buffet controlled Berkshire Hathaway at a premium to our purchase price. We own Copart Inc, auto salvage and junk yard operator that we believe will sustain its earnings even in this economic downturn. There are several smaller companies that we follow that are not well known or well understood but have stable business models. For example, Aptar Group the maker of spray dispenser used in pharmaceuticals, Village Super Market, Inc the operator of a chain of ShopRite grocery stores and Solera Holdings the developer of auto insurance claims processing software. Smaller companies tend to be overlooked by investors and are not followed by institutional investors. These companies trade at a discount to the broader market. For example, Rocky Mountain Chocolate Factory, Inc consistently earns more than 20% return on capital but it trades below 15 times earnings. RPM International Inc makes specialty paint and protective coatings and generates stable returns on capital and has a history of growing its dividend. National Presto Industries, the maker of household appliances and defense products has a solid track record of dividend and returns on assets and operating margins. These firms provide multiple earnings and also good dividend and are expected to perform well in the future. Q:  What do you do if a company stops paying dividends? A : We have a few companies that have stopped paying dividends like Oshkosh Corporation, the maker of heavy duty vehicle makers and Jackson Hewitt, a tax preparation services provider. We still hold these stocks because they were cheap when we acquire them. We will sell these stocks if earnings stop growing and if we believe that companies are not likely to pay dividend in the future. Q:  What are two or three important things that you would always avoid when building your portfolio? A : We would never want a concentrated portfolio because nothing can be taken for granted and diversification lessens portfolio risk. We would not like to own stocks that have very high earnings multiple like 25 or higher because fast growths are harder to sustain. We also try to avoid deeply cyclical stocks in industries like steel, fertilizers, agricultural firms and airlines, since these do not meet our investment criteria. With cyclical stocks the best time to sell them is when the future outlook looks the brightest. Q:  How many holdings are there in your portfolio? A : We have about 40 names in the portfolio which is just about average. We like to have each position anywhere between 1.5% and 3.5% but on an average about 2.5%. We try to balance it out by having stocks with high yield and stocks that do not have high yields but have high growth prospects. We have three electric utility stocks in this fund because they give a nice return, and are very reliable. Q:  What is the average turnover of your holdings? A : The ratio is roughly between 20% and 30%. Q:  What do you do to control risks at the portfolio level? A : At the portfolio level we control the downside risk by selecting stocks that will do well in the long run and have very good growth parameters. Our buy discipline helps us in protecting the downside risk with individual holdings. We also avoid cyclical sector stocks that prevent us from the deep market and sector corrections. Diversification in the fund also helps us in lowering market and sector risks. Our long term outlook also helps us to ride out market volatility. Q:  What about the risks of volatility? A : We are not that concerned about individual holding volatility, because that comes with the stock investing. We generally know when one stock is going to be more volatile than the other but that doesn’t necessarily trouble us. We also anticipate higher inflation in the long term but stocks in our portfolio are expected to outperform the market indexes even in the inflationary environment. The fund holdings will go down if the broader market corrects but the declines are less than the market indexes and generally rebounds are higher.