Our Process An Approach That Is Balanced, Conservative, and Diversified Capital & Security Management designs a uniquely tailored portfolio that is balanced between high-quality individual common stocks and individual bonds. In each separately managed account, the allocation may differ based on the investment objective of the client.Common stocks seek long-term capital appreciation and dividend growth, while capital preservation and a higher level of current taxable and/or tax-free income is characteristic of the bond component. Superior long-term performance is sought by careful common stock selection and by the ongoing rebalancing of common stock and bond allocations based on anticipated changes in economic fundamentals and market valuation levels.The cornerstone of our portfolio management philosophy begins with a top-down fundamental economic analysis and a top-down technical common stock market analysis. The firm develops a macroeconomic forecast of key business indicators—gross domestic product, consumer price index, federal funds, and the interest rate level for the 10-year Treasury note. These indicators project an investment framework for the relative attractiveness of stocks and bonds. Concurrently, technical analysis focuses on investor psychology and valuation levels to provide overall common stock attractiveness. By uniquely combining these two disciplines, we determine whether common stocks are over- or undervalued in relationship to bonds and money market funds. Accordingly, we then modestly rebalance the allocation of those assets to enhance long-term capital appreciation or to preserve capital.The bond allocation of a balanced portfolio is structured with government bonds, high- quality corporate bonds, and/or tax-free municipal bonds. A laddered maturity schedule of bonds coming due every several years is designed to blunt the effects of volatile interest rates, to provide current income, and to preserve capital. In actively managed bond portfolios, we seek to protect principal by selling longer-dated issues when interest rates are projected to increase; we seek to protect income by slightly lengthening the maturity to lock in higher yields when interest rates are projected to decline. The Stock Selection Process Our stock selection process utilizes a 7 point checklist to evaluate new equity ideas. The checklist involves both fundamental and technical analysis, and compares companies being considered for purchase against their own historical data as well as their peer group. The 7 criteria we look for when considering a new idea are as follows:Low Price relative to Earnings.Low Price relative to Book Value.Financial Soundness.Low Enterprise Value relative to Market Capitalization.Positive Earnings Trends.Capable Management and Insider Ownership/buying.Positive Technical Analysis.To be considered an attractive candidate for purchase in client portfolios, a stock must affirm a majority of our 7 criteria. Any stock that evaluates well against the 7 point checklist should ideally also be in an industry group that is positioned favorably in light of our macroeconomic outlook.Since we try to maintain diversified across industry sectors, we will generally overweight or underweight sector exposure relative to the S&P 500, the benchmark against which we measure our portfolio returns. Studies show that sector exposure generally plays a larger role than individual stock selection in determining how a portfolio performs, so we try to give just as much consideration to what sectors we are invested in as we do to actual stock selection within a given sector. By adhering to this selection process, in combination with fundamental macroeconomics, we are able to select equities that we strongly feel are poised to offer superior long-term returns. The Conservative Common Stock Style Individuals often fall victim to chasing yesterday’s winners, and jump on the historical bandwagon by following the currently popular investment style. During the past decade, investors have had a love affair with fast-growing “growth” stocks; this situation finally led to the dot-com frenzy and the stock market bubble. On the other hand, “value” stocks that have lower but more stable earnings growth, and that pay higher dividends, had been totally ignored during the bullish mania. Over a period of time, value stocks reverse the performance equation by outperforming growth stocks. Since Capital & Security Management’s goal is to provide more consistent long-term performance, we believe all common stock portfolios should have a conservative blend of both value and growth stocks. We make strategic allocation shifts between value and growth styles, so performance is less volatile. In essence, we smooth the common stock “roller coaster” ride by embracing both investment styles.