When we invest our clients' assets in a stock, we believe that they become partial owners of that business. It is our responsibility to find investments that have strong businesses, good management teams and which trade at prices below what we believe they are worth.

In our review of a company's business, we look for:

• A company that has an identifiable market niche which gives it a competitive advantage over its peers in the industry
• A company that has a strong balance sheet with favorable capital and leverage ratios
• A company that generates "free" or operating cash flow in excess of what it takes to run the business

In our review of a company's management, we consider:

• Management's overall ability and experience levels
• Management's owner orientation
• Management compensation and incentives

In our valuation process, we consider:

• The company's profitability
• The company's balance sheet strength
• The company's ability to enjoy these advantages over time
• The valuation of similar companies in the industry as well as prices received by similar companies in acquisitions and mergers
• The valuation level of the stock market

We don't purchase a stock just because it's cheap or has "come down" from previous levels. We do our homework first. Furthermore, we will not invest in a company's stock if we don't understand how to value its underlying business. This process gives us a target price which drives both our "buy" and "sell" disciplines. Simply put, we strive to buy stocks of good businesses when they sell below what we think they are worth and sell them when they reach fair values.

When fully invested, most of our equity-oriented client portfolios have 15 to 25 stock positions. However, it is not unusual for AFIA to leave cash positions in a portfolio while we are in the process of building the equity positions or if we are in a period when higher stock prices make it difficult for us to identify enough opportunities.