Morningstar Advisor - April/May 2009 - 15

It’s based on a disciplined, price-sensitive methodology that is focused on economic reality. Basically, I determine if an entity is selling below its economic value. If you and I were to throw our wallets in the middle of the table and decided that we were going to buy a business, this is the way we’d go about doing it. I don’t know if I have a great deal of optimism. I am finding more opportunities, but I’m trying to be opportunistic with those opportunities. I’m taking itty-bitty baby steps, buying small quantities on the market’s down days. It’s an institutional version of dollar-cost averaging. I was blessed to do my graduate accounting work under Abe Briloff, who taught me how to critically interpret financial documents. My wife tells me that I’m the Shirley MacLaine of the accounting world. The documents talk to me. I can fairly quickly discern the integrity of the numbers. It’s another layer of downside protection and avoiding the things you should have known about by reading the documents. I like to say that the stocks in my portfolio are events waiting to happen. It’s not that I buy companies with the expectation of them being taken over. But the characteristics that they possess make them interesting to other people. The great chance value as an analyst. of discovery. They’re not has heavily analyzed as larger stocks, and there’s more chance to add bought it 51 years ago with my bar mitzvah money. It was Burlington Industries, a textile company. I not a good investment. This is the worst in my 40 years of experience, because it’s spread over so many industries. The closest to it is 1973–74. Things got so bad at the end of ‘74 that rather than face the humiliation of all the mistakes that I made, I simply turned off the Quotron machine. I saw things that I thought were cheap go down another 25%. That experience taught me things that I’m implementing today: Be cautious and dollar-cost average. Yes, I’ve dusted some off, such as net net working capital, which was developed by Ben Graham in the early 1930s. It says, let’s sum up cash inventories and receivables, deduct all liabilities, and relate the remainder to the market capitalization of the company. It’s a classic liquidator’s view of buying a business. I’m also paying more heed to yield. People are going to realize that a big part of prospective total returns is going to come from dividends. Industrial and consumer companies. People are missing that many of the industrials have products that enhance productivity and reduce costs. On the consumer side, yes, people are spending less and saving more. But Americans love to consume. If we get this thing righted to any degree, people will be back shopping. One of your colleagues at Morningstar once said that Special Equity is like sushi. It’s an acquired taste. The fund is for people who are willing to give up some of the upside of U.S. equities in return for a vehicle that will protect them should there be further downside. MorningstarAdvisor.com 15

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Morningstar Advisor - April/May 2009

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