It is a stock that was trading at about 10 times earnings with a compelling dividend yield. But what attracted us mostly was the management, whose philosophy doesn’t fluctuate in different market environments. In fact, they increased the number of stores in a weak environment achieving attractive real estate deals. When the market rebounded, the stock reacted favorably and is probably up about 60% from our initial investment and still remains attractively valued.

Another name that we purchased early this year is Nokia. The company wasn’t liked much at the time, but we do prefer to be contrarian. We have owned Nokia in the past when it was a growth company, and now it has become a value company trading at a forward-looking P/E ratio of 13. Collectively, we had done a lot of work on cellular companies, and Nokia is a dominant handset provider to many of them. We concluded that even without major improvements, the stock was dramatically undervalued. Now they are improving the business and gaining market share, and everyone is upgrading the stock.

In the emerging franchise category, America Movil is a compelling investment with attractive valuation for the growth it provides. It is the leader in cellular communications based in Mexico, where there has been strong growth in wireless penetration. It is also expanding throughout Latin America.

A similar investment is China Mobile, where the growth of subscribers is amazing. They are more profitable than many of their developed market counterparts although they offer service at a very low cost to customers. Both of the companies are well positioned due to the growing popularity of cellular service, which is becoming more affordable as the GDP per capita is increasing.

The emerging markets represent an area of dramatic growth and there are interesting ways to explore that trend, not only directly, but also through developed market companies such as LVMH, Kingfisher, and SAB Miller, the dominant brewer in South Africa with significant exposure to Latin America.

Q: What is your buy and sell discipline?

A: Regarding purchases, it can take us two days or two months to buy a stock, depending on the case. We may decide to look for better entry points or for more information. We always try to know our companies as best as we can, and to develop a competitive advantage. Not only do we need to understand the financials, but we dig deep into the more qualitative elements, understanding the unit profitability, brand equity, the competitive landscape, the management team, and corporate governance issues. We try to attack each investment from many different angles.

We do establish price targets, and when a stock hits that target, we revisit our investment thesis. Usually, we sell a stock once it reaches our target. When prices fall, we are likely to add to an issue if our investment thesis is intact. Regardless of the stock performance, if we believe that our investment thesis is no longer valid and the fundamentals have deteriorated, we sell the stock. We do not ride the investment down because we own only 50 to 65 names. We also have limits on industry and emerging market exposure, so from time to time we will sell a stock to replace it with a better idea.

Q: How do you monitor and control risks?

A: Risk control is partially driven by our sell discipline and has everything to do with knowing our companies. Additionally, because we work together, we can look at the world from different angles. When we present a stock to our portfolio managers, any member of any equity portfolio can lend a unique perspective or ask tough questions, and that’s a key way to get a better grasp on a company.

We also have limits on position sizes in the emerging franchises and emerging markets. In emerging franchises, we initially invest 2% or less and we limit all individual positions to 5%. Such cases are usually the result of rapid capital appreciation, and then we often trim the stock. Trimming is another way to manage risk, but a crucial part is having many eyeballs looking at the entire portfolio every day.

The stock selection process itself is important because knowing the names well and keeping up with them on a regular basis helps to mitigate risk. I would also mention the diversification by and within industries. We might have big exposure to the telecoms, but within that, we are exposed to emerging and developed markets, growing and mature telecoms, wireless and fixed line providers. Overall, we are bottom up stock pickers and every stock in our portfolio matters.