Q:  What core beliefs guide your investment philosophy? A : We believe that when we view the stocks as stakes in businesses and with a long term time horizon we are likely to generate better returns for our shareholders. It is our conviction that reacting to news or short-term events in markets is a losing strategy. This has become only more true as the popularity of the strategy has increased. We limit the number of securities in the portfolio because naturally our 30 best ideas are going to be better than our 100 best. Also it allows us to monitor our holdings better and build a deeper understanding of our investments. Additionally, we look for investment opportunities that are likely to benefit from long term secular trends. Q:  How do you convert your investment philosophy into the fund’s investment strategy? A : Our goal is to seek long-term growth by concentrating investments in industries that are growing. The fund invests primarily in stocks of U.S. companies that have above average growth potential and are trading at attractive prices. We do not base stock selections on the size of a company, but rather on assessment of a company’s fundamental prospects for growth. Our strategy is to keep a limited number of stocks in a limited number of sectors. We try to find the most attractive areas, and that attractiveness is a function of both the long-term growth of that sector and also the company valuation. We also try to take advantage of varying time horizons in the market and the myopic nature of so many investors in the market because it often presents opportunities to investors that are willing to be patient. In other words, there might be a short-term issue with a company or a sector that causes it to trade off, which presents an opportunity for a long-term investor. The difference in time horizons has really helped performance over time. We do not try to trade on the most recent data points. We focus on behavioral finance perspectives that provide opportunities if one is willing to take a contrarian stance. Q:  What are the analytical steps in your research process? A : Our research process begins with a top-down analysis of the economy and various macroeconomic factors, followed by an evaluation of industry sectors. It then focuses on the most attractive companies in these areas based on qualitative and quantitative factors. Our investment strategy involves overweighting the fund’s position in the industry sectors we believe offer the best risk-reward. Our ideas can come from anywhere. We are always on the lookout for opportunities and ideas that can come from reading periodicals, research reports or from people that we talk to. There is no formal screening process. We are trying to find the opportunities in overlooked areas and take advantage of the short-term nature of the market. We are prepared to invest when others are fearful and are afraid to invest when consensus is extremely bullish. Once we have an idea, we look at various valuation factors to try to narrow down the list. Obviously, different factors carry more weight for different industries or stocks. We look at the secular trends affecting the company and the industry and look for sustainable competitive advantages. We look at the returns on capital that the business generates and whether there has been insider buying or selling. We also look at what the sentiment is on Wall Street and not only for that company but also for the industry. Ultimately, it boils down to how sustainable the business is and what’s the market and how does that compare to what the market is giving the business credit for. We do not believe in setting target prices when we buy companies. Our belief is that when we set a target price, we’re almost locking ourselves into making a decision about a stock before we have to. We have never used target prices. We might have an idea about what a company is worth but it doesn’t mean we make the decision ahead of time to take action on the stock when it hits that price. Q:  Could you give a couple of examples to illustrate your research process? A : For example, we bought Amazon.com, Inc. several years ago when nobody liked it. The company is a leader in the world of Internet commerce. The secular trend of online retailing is a long term trend that we believe in and we believe that the business will only grow. In this way, investing in Amazon offers an excellent way to benefit from this trend that is in place. At the time we made the investment they were not generating the operating margins that investors wanted to see and that was only because they were constantly reinvesting in the business. But this caused the market to be dissatisfied with Amazon and that created an opportunity because investors were overlooking the long term trend for the short term pain. People were underestimating the potential of their business and the trust factor and credibility that Amazon was building in its business and really the arbitrage opportunity it had at its disposal, meaning it could undercut really any other online retailer. With regards to the valuation, the company looked expensive because the margins were low and people were assuming that their margins were not going to get better but we thought they would. Amazon has always looked expensive on an earnings basis but from a free cash-flow perspective, which is more relevant, it was not nearly as expensive. And in fact, even with this huge run that it has had, it is still trading around 27 times trailing free cash flow right now. That is high but not outrageous, and the prospects for that free cash flow to continue to grow over time are very bright. It’s not an outlandish valuation considering the strength of their business and competitive advantages. The reason we were attracted to this company was not just the margins. We looked at their potential and thought they had good barriers to entry with their scale and that moat was only going to get wider. And so we thought it was a wise investment given all those factors; eventually operating margins started increasing because of the leverage and the scale. Another example is Charles Schwab Corporation, a leading provider of investment services including online trading, financial advice and banking solutions. We owned Charles Schwab for a long time. We particularly like it right now because the market has traded that stock down, or it has lagged the market for short-term reasons. One of the biggest reasons for the lagging performance is the effect that low short-term interest rates are having on the company. Schwab has money market funds and they have had to waive their fees because if they did not, the return that they would offer to investors would be negative. So, because they are in this fee waiver situation with interest rates so low, it’s affecting their bottom line. It’s costing them a lot of money each quarter. As a result, their earnings are down and so the stock has languished. Our view on this is that dynamic has nothing to do with the long-term value of the company. Nothing has changed at Schwab fundamentally. They remain an asset gathering machine with tremendous scale. The intrinsic value of the business has not changed. Schwab has built a platform which is attractive to consumers/investors and also product manufacturers and advisors. This platform has tremendous value because it offers an attractive service to parties on both sides and it would be extremely difficult to replicate, given its scale and trust. Getting back to the current situation, the net asset flows haven’t changed, which means increasing revenue for the company over the long-term. We are pretty sure interest rates are not going to stay zero forever. They will go back up at some point. So when they do Schwab won’t be in the same fee waiver situation, earnings will pick up and the market will likely start buying the stock again. Q:  What is your sell discipline? A : There are very few reasons for us to sell a stock. One is, if the investment thesis was not as per our expectations or changed, meaning the reasons we bought the stock are longer valid. The second reason is valuation. And the last reason will be if we have a better investment idea.. We generally stay fully invested. So, if we find a new stock we want to buy, we have to sell another one to fund that idea. But we don’t have any strict rules and we don’t believe in filters or price targets. We do trim if the position becomes too large but there are no hard rules on that. Q:  How do you execute your portfolio construction? A : We are a concentrated mutual fund and usually hold a relatively limited number of stocks. Currently we have about 39 holdings. The portfolio turnover is around 15% to 20% and the appropriate benchmark is the S&P 500 Index. Q:  What does “aggressive” stand for in the fund’s name? A : The investment style of the fund tends to be aggressive. We don’t have a lot of holdings and we are not afraid to make large bets and we don’t try to hug the benchmark. There are many sectors and industries we don’t own because they do not meet our growth criteria but we definitely pay a lot of attention to valuation while making stock selections. We try to select companies that have good growth prospects and but we try to buy them when they are attractive. Q:  What are your views on risk and how do you measure or contain it? A : The permanent loss of capital is our measure of risk and we try to control our downside with the price that we pay. Our risk controls really come down to being prudent and evaluating risk on a case-by-case basis. We don’t have strict limits that a certain percent has to be in a certain sector. Expanding on this, we actually seek risk when the market is paying us to do so. When the market is not paying us enough to take risk we retreat. At the portfolio level, we look at the correlation between our stocks, meaning how much of our stocks are reacting to the same thing and how much they trade together. We look at how much of the holdings are cyclical versus non-cyclical. That would be another way of looking at risk. Q:  Do you factor in macro events as part of your investment selection process? A : We do focus on macro events because they have an impact on our investment selection process. We are big believers in the yield curve and historically it has been an excellent indicator of the economic expansion or contraction. Everything starts with our big picture outlook. What is trade policy? What are the long-term macro trends? What are the implications of the budget deficit/surplus? What is the regulatory environment? We believe the way to outperform is to try and figure out what the market is missing. We position our portfolio based on what the market is discounting and expecting and how things may turn out different. We try to keep positions where the risk/reward ratio is favorable. In the current economic downturn, free cash flow at companies has held up incredibly well. It promises to get even better given the cutbacks we’ve seen in costs and the fact that revenues are likely to grow over the next year or two.