Q:  What is the history of the company and the Dodge & Cox Stock Fund? A : Dodge & Cox was founded in 1930 and is one of the largest privately owned investment managers. The firm provides investment management services for individual and institutional investors in mutual funds and private accounts. Currently, the firm’s total assets under management are about $200 billion. Dodge & Cox manages domestic, international, and global equity, fixed income, and balanced investments. The Dodge & Cox Stock Fund was started on January 4, 1965 and it is our domestic equity fund. The other funds in our line-up are the International Stock Fund, the Global Stock Fund, the Balanced Fund, a blend of the domestic equity and domestic fixed income, and the Income Fund, a domestic fixed income fund. Q:  What are the tenets of your investment philosophy? A : We focus on companies with low valuations and good prospects for earnings and cash flow growth as we see attractive investment opportunities. We believe that an investment’s worth fluctuates much more widely than its underlying fundamentals. Q:  How do you convert this philosophy into the fund’s investment strategy? A : The fund invests primarily in a broadly diversified portfolio of common stocks. We invest in companies that appear to be temporarily undervalued by the stock market but have a favorable outlook for long-term growth. Additionally, we focus on the underlying financial condition and prospects of individual companies including future earnings, cash flow and dividends. Various other factors, including financial strength, economic condition, competitive advantage, quality of the business franchise, and the reputation, experience, and competence of a company’s management, are weighed against valuation in selecting individual companies. We are skeptical that short-term market trends can be predicted with consistency, so we look further out in our analysis, focusing on the key fundamental factors that will determine investment value over the long-term and try to find investment opportunities. We invest with a three-to-five-year investment horizon. Our team decision-making process involves thorough, bottom-up fundamental analysis of each investment. Q:  What are the various steps in your research process? A : We employ a bottom-up research process. As we tend to get ideas from a lot of different areas, we focus on stocks that appear to be statistically cheap – valuation plays an important role in our process. We have a team of analysts following industries on a global basis. They divide their coverage by industry and, they try to understand the potential for future growth in earnings and cash flow, the strength of the business franchise, and the quality of the management team. The process involves modeling each company’s range of potential outcomes for earnings for the next three years. The models are based on our analysis of the company’s income statement, balance sheet and cash flow, and reading all the different documentation. We also visit the company on-site and visit with the management; we call customers, suppliers, and competitors to try to get a 360 degree perspective on the company and management. We also use outside consultants that may have specialized knowledge about the company’s products. After our analysts assemble their extensive research they generate a detailed report which includes an advocacy position. We then hold meetings where individual analysts advocate their investment ideas to their peers. Each recommendation is subjected to intense group scrutiny both for its merits as a specific investment and its role in the overall portfolio. Once discussed at the preliminary level, the idea will then go to one of four Sector Committees: Finance, Energy/Industrials, Health Care/Consumer, or Technology/Media/Telecommunications. Each Sector Committee is comprised of senior analysts who vet the idea further. If that Committee is satisfied with the idea, it will advance to our Investment Policy Committee. The Investment Policy Committee not only evaluates the idea and assesses if it is suitable for the Stock Fund, but also analyzes the overall risk to the portfolio. The clear objective is to determine whether we are buying this company with undue exposure to a particular industry or a possible economic outcome. When all voices have been heard, the group takes action or reconvenes if further research is warranted. We believe that this collective decision-making process enhances individual thinking and reduces dependence on any single person. Q:  Could you highlight your research process with a few examples? A : An interesting example would be Norwest Bank, which eventually acquired Wells Fargo and took its name. We have owned Norwest/Wells Fargo for twenty-seven years. What interested us back in the mid-1980s about the company was that management was very committed to creating shareholder value. We observed a discipline in the management of Norwest over time, which allowed us to have confidence that the company was really being run for the benefit of the long-term shareholder. In the mid-80s, in the United States, a lot of bank management teams did acquisitions of other institutions at very high premiums to market, book, and multiples of earnings. A lot of those acquisitions did not work out very well from the point of view of shareholders. However, Norwest did not just carelessly do deals to grow in size, but bought other organizations at prices that were quite reasonable after doing a thorough due diligence. Over time Norwest was trying to build a community banking business and gradually boost the strength of the franchise. At that stage we felt that Norwest was a very attractive proposition that could be bought at a reasonable price. We held that stock for a very long period of time because we saw a consistent focus on shareholder value, the company’s determination to build the franchise, along with thorough due diligence behind the acquisitions that they did. Over the years they have evolved into a tremendous business becoming one of the largest banks in America. Another example is Citrix Systems, Inc., a company that we added to our portfolio about four years ago. They design, develop and market technology solutions that enable information technology services to be securely delivered on demand independent of location, device or network. Citrix has a very interesting product that allows a person to bring up one’s desktop virtually from another location. That helped us recognize it as a terrific stock and a big growth opportunity with a lot of top-line growth, an innovative product and a rapidly expanding application. Fortunately, we were able to buy into the stock before people had a full appreciation of the kind of value that they were providing to the marketplace. The stock did very well and eventually got to a point where it was very highly valued by others. Although we still thought that it was a very good business with a lot of growth opportunities, the price we were paying was just too high, so we decided to sell. Q:  How do you construct your portfolio? A : We typically have somewhere between 70 and 100 names in the portfolio. Looking carefully at the weighting of industries, we try to stay away from being overly concentrated in any one industry. In terms of individual companies, the largest positions in the portfolio are generally below 5%. We currently have names that are in the region of 4% of the portfolio. Historically speaking, finding positions at 5% is rare, so we have not had a great deal of exposure to any individual name. We do not want to be dependent on a single name, industry, or a set of macro-economic factors. The turnover in the Stock Fund over long periods of time has been about 15% a year, so the average holding period is six or seven years. Q:  What do you consider as risk at the portfolio level and how do you control it? A : We maintain a long term investment horizon, and try to understand the downside risks, as well as the opportunities, for each of the companies in the portfolio. We also think that it is crucial to be diversified as a way of preventing a certain number of unpredictable negative events from causing excessive damage to the portfolio.