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RISK MANAGEMENT

IN OUR VIEW, THERE ARE TWO SEGMENTS OF RISK:
One is the risk that a company flounders and goes into long decline like many companies in the domestic steel industry in the last half of the 20th century, or in the case of newspapers since the late 1990's. Such erosion of a company's position may emanate from internal sources such as bad management, or externally from a change in the competitive balance within the industry, or from increased foreign competition. The other type of risk, market risk, is the risk of the individual stock or the general market declining and eroding the price of stocks.

Our stock selection process is our first weapon against both kinds of risk.

We contrast a company which gets into long term trouble with a company that continues to grow from decade to decade. For example, we would contrast Bethlehem Steel with Coca Cola, or Sears Roebuck with Wal-Mart. In our conservative approach to investing, we do not think we need to reach into speculative realms to garner superior results. By staying away from debt-ridden secondary or tertiary companies that no longer dominate or lead their respective industries, we believe we are limiting company risk. Stock prices and company earnings are correlated over long periods of time; thus a company with a strong competitive position and growing sales and earnings is, in our opinion, the best prevention against the long-term erosion of principal and the most effective method to build capital.

Our pricing disciplines can turn an investment in an outstanding company into a bargain purchase, but they do double-duty by reducing downside quotational risk.

We limit market risk if we do not overpay. We avoid overpayment by the pricing mechanisms and disciplines described in the Investment Process section. The risk of a general market decline can be damped by observing our pricing disciplines across the entire portfolio.



BALANCED AND FIXED INCOME ACCOUNT RISK MANAGEMENT

In balanced and fixed income accounts, we are experienced at constructing diversified and defensive portfolios of high grade bonds that, even more than in our equity portfolios, put preservation of capital ahead of high returns. In bonds, since the investment pays off at par, there is little or no appreciation potential (unless the bonds are bought at deep discount) so it makes no sense to sacrifice safety for high yield.