Overall Investment Philosophy We commit resources to securities when we believe they are inexpensive and reduce exposure to securities when we believe they are overvalued. This philosophy leads us to seek a “margin of safety” and to avoid short-term trading strategies as our core investment philosophy. In addition, this discipline may require our absence from purchases for extended periods. We believe the capital markets are efficient over long periods of time and inefficient in the short term. Our historical research tells us that over full market cycles stocks have generated total returns roughly six percentage points above the rate of inflation, bonds have returned one to two percent above the rate of inflation and cash yields have returned roughly approximate inflation. Thus, we believe stocks are a superior long-term asset class to other asset classes and should normally be over weighted in portfolios. We take exception to this principle during periods of fundamental overvaluation. Our fundamental research incorporates analysis of the balance sheet, income statement components, and cash flow. We interview management, competitors, customers, and suppliers. We make decisions as to the sustainability of market position or leadership and frequently assess the quality of the companies in client portfolios. We believe that investment in, and long-term ownership of, high-quality cash generating companies, which grow their business franchise at a faster rate than the overall economy, provide the most rewarding long-term returns on capital employed. We avoid overpaying for businesses owned in our client portfolios. Our process incorporates the value of a company relative to earnings, book value, cash flow, and dividends, as well as the projected growth rates of these companies. We evaluate businesses as a private investor would do when buying an entire company, which helps us understand the underlying value of what we own. By buying companies with high internal rates of growth, and by buying their businesses for less than our estimate intrinsic franchise value, we believe our equity returns will, over time, approximate the growth rates of our companies plus accretion back to fair value. Equity Investments Through critical fundamental analysis, we strive to invest in companies who can, in our opinion, grow their sales, cash flows and profits at a faster rate than the economy. We look for companies that consistently generate free cash flow and can earn high returns on capital. We evaluate the quality and integrity of management, often through one on one interviews with management at their corporate headquarters or in our office. We talk to other participants in the selected industries including suppliers and distributors, customers, and competitors. Our investment philosophy is a fundamental, bottom-up approach where we focus on uncovering individual equity opportunities through risk-adjusted investments. However, our approach inherently includes a review of economic and market conditions as these impact the entire universe of stocks. We therefore make strategic asset allocations based on our understanding of client objectives, risk tolerances, and our proprietary view of the financial markets. We are generally pleased when a company we would like to buy drops significantly in price due to short-term events, if the long-term nature of the company is sound. These short-term events allow us to build a long-term low-basis position at favorable prices. Fixed Income and Cash Equivalents Our fixed income approach encompasses a review of the risk and reward tradeoff. We evaluate quality (credit) spreads, the slope of the yield curve, duration, convexity properties, inflation and economic factors, absolute yield and benchmark characteristics. We seek to provide a safe income stream and believe risk capital should typically be employed in non-fixed income asset classes. Depending on the taxability of your portfolio and other considerations, we typically own U.S. government and agency securities, high rated corporate securities, commercial paper, high rated municipal securities and mortgage-backed securities. Most fixed income securities purchased are held to maturity. However, decisions to alter asset allocations or the characteristics of the fixed-income portion of a portfolio may necessitate a sale. Thus, liquidity of the security is a key consideration when purchasing fixed-income obligations. Our investment approach may involve investing in cash and cash equivalent vehicles. An individual client’s allocation to cash and cash equivalents depends on their individual circumstances. However, as a defensive strategy and to ensure adequate cash is available to invest in equities and other securities, cash may be a significant investment for an individual client and may continue to be a significant investment for a considerable period of time. Since cash and cash equivalents may have a low expected return, an individual client portfolio may experience low or negative net returns as a result of management fees and/or fees related to cash and cash equivalent management fees.