Q: How does a CEO, chief investment officer and active manager of four mutual funds manage his time efficiently? A: Systems and processes and good reporting metrics. I have processes and systems for every department. I have systemized the metrics. We basically embraced ISO 9000, which is the best system to create the best practices. We use very simple, what I call Darwinian models that are adjusting, so we regularly get feedback to adjust to the dynamics of markets. Our marketing team and I respond on the information we get back from these metrics to make decisions. It's very Darwinian driven. Q: To me that means a process of elimination. How do you view it? A: Darwin said the strong survive, but what he meant was that the stronger are defined as who's the fastest to respond. You can be a big, strong dinosaur but you're extinct because you didn't respond to the changing environment around you. How we respond to market events, government policy changes, recessions, war, whatever, it doesn't matter. The question is how fast we respond. So, we created a lot of systems. When I look at my financials for a response, I look at the rate of change over five days every week. I look at the changes in 20 business days every week. I look at the 60-day rates of change every week. I'm always looking back 90 calendar days or 60 business days to get an idea of am I on track with my vision and my goals for the company and for any fund. That methodology allows us to make appropriate responses. If you ask as CEO how I manage 65 employees, 12 different funds, 80,000 shareholders, two dogs and two boys and regulators everywhere I look and keep everyone happy and focused, it's by these feedback systems. They've also generated a significant turnaround in our fund performance since I've taken over as CIO. Q: Based on your background, I can understand why you manage these types of specialty funds. A: That is part of my experience. I was originally a research analyst and I'm very much a 'quant.' Q: What is your investment style? A: Our models focus on the intermarket relationships and the dynamics among commodities, currencies, interest rates bonds, country GDP trends and equities in the different stages of their economic cycle. So, with our China Fund, we take a look at all the different countries. We compare their GDPs every month the data comes out. We look at them for the past month's rate of change, the quarterly rate of change, past one-year rate of change and we rank them. We look at sectors this way. If we notice that China's industrial production was 17% and the GDP was 8%, and they were the most significant factor to basic materials and commodities - a massive sucking engine of commodities. Therefore, in our analysis for our Global Resource Fund, we buy stock in a Chinese copper company for our China Fund. We buy that at 88 cents and it goes up to $1.10. Copper rises and it has a big movement. That is why we look at the different intermarket relationships and the dynamics amongst them. Q: That's definitely quantitative analysis. A: We call those critical drivers. Whenever something has more than a 70% co-relation off a macroeconomic event or a stock that is commodity driven, then we term those as critical drivers. We try to get three to five critical drivers from different economic events that have high co-relations. Then we add them. If we see the stock price acting in the direction that is highly co-related with those economic factors then we will go long the stock. Q: Are you saying that you don't necessarily rely on fundamental research? A: How we pick one stock over another would be fundamentals. We have an earnings model. Every day we look at the four-week rates of change out of First Call's numbers. And we look at the stock price relative to the change in the earnings forecasts. We look at quarter over quarter rates of change in earnings as they come out in addition to year over year. I have also found that our models are highly responsive and directional to structural changes caused by external variables like new government regulations and interest rate policy changes. The biggest part for us is to pose the question, where are our leaders coming from? Where are our laggards? We do what we call a SWOT analysis or the final analysis. We look at the strengths and weaknesses, opportunities and threats. Q: Spoken like a true quant that is comfortable with using complex models. Is there more to it? A: Our system monitors, compares and creates multiple best to worst scenarios before we make a final decision. Then we apply the weight of the evidence to assist us. When it comes to trading disciplines we have a host of statistical analysis we put a stock through. We use oscillators over several different periods of time. When people hear the expression technical it seems they only think of a chart. Rather than just looking at the picture of the chart, what we look at is what's the mean price over this period of time and is the stock one or two standard above that mean that day or below one or two standard deviations. This process is called price risk management. Whenever a stock is up one standard deviation over daily prices for a year, weekly prices for five years and monthly prices for 15 years – when all three are above one standard deviation above its mean price we will sell 10% of our holdings. If it's up two standard deviations, we will sell 20% of our holdings. Q: Isn't that like the old market maxim known as selling into strength? A: I found that doing statistics is like being a pilot. You have all these diagnostic tools in front of you and you have to use those tools to fly through clouds. We look at investing as all these diagnostic tools in front of us and how are they guiding us to take us from Saratoga to Atlanta. That has really helped us. When a stock falls one standard deviation and the fundamentals haven't changed, we immediately buy back that stock. So at the end of first quarter, our gold funds were 22% cash. Q: I noticed all three resource-based funds had high cash levels. A: What happened was when gold went to $380 and oil went to $33 a barrel, they all went up two to five standard deviations above their mean. So I sold. Recently we've been a buyer of certain stocks we have sold. Now, we're down to 14% cash. Like Warren Buffett says, if I can't find the value according to my checklist, then I don't commit. The fact is we use a host of vertical and horizontal models that I feel comfortable in making that decision. We don't wing it. Because our gold equities had this dramatic increase in their volatilities, our models ended up generating opportunistic sells and lower risk buy signals. That's the big thing we look at. It helped us with oil and gas stocks. It helped us with large cap. Q: The movement in gold is also difficult for me to understand. A: Here are the two critical factors to understand gold. Gold goes up when the dollar falls. When there is inflation, gold goes up. And you will have currency pressure whenever your monetary and fiscal policies are dysfunctional. It doesn't matter what country in the world. If your monetary and fiscal policies are out of equilibrium, the currency comes under pressure and gold performs. It's very linear this way. Our study looked at when has the American dollar been weak and when has it been strong? Are there any critical factors one can identify? What we've been able to identify is the twin engines of a sustainable move in gold. War is not one. People may run gold up but it's going to quickly come down. High gold prices will only hold if the dollar is weak. The dollar will only be weak if there is massive deficit spending. And, interest rates are below the inflationary rate. That's the other catalyst. What we have seen since 9/11 is we went from a surplus budget and the strongest dollar to growing deficit spending and interest rates going to a four-year low. Today, inflation is three percent and money market funds are paying you one percent. Would you buy a currency that you're going to lose two percent after inflation? No. Whenever a country's debt against GDP rises above five percent, its currency comes under pressure. Q: What is the advantage to investing with U.S. Global? A: One of the big things in a report on gold we issued was the reversion to the mean. We don't run and tell people that world is coming to an end and to buy gold. Using Markowitz's studies on mean reversion, different asset classes have different volatility factors and what we say is we have several low co-related asset classes to the S&P or Nasdaq. These low co-related asset classes help you to diversify your risk. Whenever there is change or stress, then gold performs exceptionally well. What we recommend is that people maintain a five percent exposure to it and that they rebalance every year. In 1997, 1998 and 1999, the U.S. dollar was the strongest currency in the world; interest rates were three percent above the inflation rate; we had a surplus budget. Ever since 9/11 things have reversed. But during that period, gold was a poor performer. Using this dynamic discipline of rebalancing, you would have been a seller of your technology and growth funds and a buyer of gold. Q: Is the rebalancing a basic theme of your investment strategy? A: You rebalance every year. If you were disciplined, you would say, I'm up 40% in tech stocks this year, but my gold stocks are off 20%. If you have a five percent weighting in gold, to maintain that weighting, you'd have to sell some technology and realize some profits to buy the gold. This system forces you once a year to catch the swings in the different asset classes. For three years, equities were overvalued; gold was undervalued; and every year you would have been selling a bit of the overvalued to buy the undervalued. Now, we get the stock market reversing itself. The stock market goes through capitulation. And guess what? The gold funds are up wonderfully. You bought them cheap. Now they're up. And bond funds are up. You're net up in your overall portfolio. That's our thesis. One of the big mistakes by modern asset allocators and money management advisors is they thought big cap growth and small cap were sort of counter cyclical to each other. But in a severe bear market all equities fall. Q: You're correct. Small cap stocks fell off a cliff in 2002. A: By diversifying with low co-related assets such as our tax-free bond funds, natural resources and gold, you have the ability to manage price risks of markets much better. I think more RIAs - your readers - are bewildered because the global equity meltdown has impacted all equities except for natural resources and bonds. I'm a good believer in deflation not inflation. I'm a big believer that people should look at tax-free securities. We've done a study on tax free-. Our near-term tax-free fund has very little volatility. It hardly moves. But the yield is double the money market funds and more than double on a tax equivalent basis. Q: Is there anything else about U.S. Global that should interest TICKER readers? A: You know that we're public. Our largest shareholder is Royce Funds. Chuck Royce owns 15% of us. Ever since 9/11, they put ten percent of their assets into gold stocks. We have some very sophisticated investors like Paul Stephens of Robertson-Stephens. He owns five percent of the company. They're all doing it based on the leverage to gold.