Our investment process centers on the application of principles first articulated in 1934 by the founders of modern security analysis, Benjamin Graham and David Dodd. We begin the process by focusing on a company's underlying fundamentals, looking for changes in their market positions and their ability to generate free cash flow. Our goal is to identify companies in the public market that are selling at differences to their intrinsic or private market values, with a catalyst in place to generate returns. Over the long term we strive to achieve superior risk-adjusted annual returns above inflation for our clients.

Our analyst follow industries on a global basis, and narrow the universe of potential investment candidates to a short list of the most attractive companies. All publicly available company material is reviewed, including annual and quarterly reports, 10-Ks, 10-Qs, and proxy statements.

Each analysts develops an operational understanding of their industry, effectively becoming an expert in that industry. The analysts hone this expertise by continually visiting companies and their senior managements, and by talking to competitors, suppliers and customers. They also develop and maintain government and trade sources to derive an overall understanding of their industry. In addition, our firm hosts a number of industry seminars, where the top executives of the leading firms share their insights with the investment community.

The objective of this process is to identify companies that trade at significant differences to their intrinsic or private market values.

We continually visit the management of hundreds of companies and integrate their input with our knowledge base. Our goal is to understand management's motivations and expectations. Given our approach, we want to know who our partners are and if they are working to enhance shareholder value. This process, coupled with our financial analysis, helps us select the most attractive investment candidates for our portfolios.

As discussed, we employ a three-dimensional approach to valuation:

• Earnings per share
• Free cash flow
• Private market value

The first step is to analyze the income statement and cash flow. Cash flow is viewed as a barometer of financial health, and often foreshadows earnings trends. We attempt to forecast the direction and growth rates of the earnings and cash flow streams.

The second step is to examine the balance sheet. The corporate balance sheet is recast, assessing real-world values of inventories, property, plant and equipment and stated book value.

To these two analytical processes, dynamic forecasting and static asset and liability valuation, we add our assessment of the PMV of the business. In other words, what would this company be worth to an informed business person attempting to create or purchase a business with similar characteristics?

Identification of a mispriced situation, however, does not necessarily guarantee a rewarding investment. The next step is to determine events that will narrow the spread between a stock's public market price and our determination of its intrinsic value. We call these events catalysts. Catalysts include industry fundamentals, changes in the regulatory environment, management, financial engineering, merger and acquisition activity, spin-offs and sales of divisions.

After we have identified and selected stocks that qualify as candidates based on these fundamental and conceptual considerations, our objective is to structure a diversified hedged portfolio. This has been a proven long-term method for creating wealth, risk adjusted, in the stock market.