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Our stock selection process is centered on fundamental security analysis and emphasizes companies that are industry leaders or dominate certain niches. These companies generally have certain competitive advantages or franchises. Our favorite idea is a company that earns a superior return on its capital and that we believe has the potential to continue to earn superior returns over many years.

We prefer companies that are strong cash flow generators. Our focus is on companies that produce cash in excess of their capital spending and dividend payouts. This free cash can be utilized proactively on behalf of the shareholders. Possible applications include acquisitions, share repurchases, and increased dividends. Management should be skilled with respect to the allocation of the company's capital.

We take a close look at the management team, which should have an ethical approach to doing business, a commitment to the shareholders, and an excellent track record. We believe that management should own a meaningful long-term holding in the shares of their company.

We typically seek to purchase stocks at a discount to what we judge to be their intrinsic value. We prefer to fill our portfolios with our favorite ideas purchased at compelling prices, but only under relatively rare conditions can we find that many marvelous opportunities. Thus, our portfolios may contain shares of good companies along with shares of outstanding ones. We seek a greater discount to intrinsic value when a company does not fully meet all of our criteria.

We consider qualitative and quantitative factors in making judgments about the intrinsic value of a business. Our efforts are focused on traditional security analysis. Portfolio cash reserves can expand when we are unable to find a sufficient number of our preferred companies at suitable prices. However, we do not attempt to time the market by making macro judgments about the economy or the market.