1. SE Michigan BI Model Club: Portfolio Management Process Discussion Presented by: Team B July 17, 2010

2. Path for Success in Long-term Investing  In his March through June, 2010 issues of Expected Returns, Mark Robertson (Manifest Investing LLC) discusses how, historically, it is not unusual for the “average investor” to underperform the market.  Fortunately, Mark also illustrates, and roughly quantifies, how a Strategic Long-term Investor uses a consistent approach, based on patience, discipline, awareness and imagination, to vastly outperform the “average investor”.

3. Six Elements of the Approach  Element 1: Ownership and Self-Direction Acting judiciously in stock selection. Own the process. Element Relative Return Advantage: ~ 1 to 1.5%  Element 2: Invest Regularly The power of dollar cost averaging. Advantage diminishes over time, increasing the emphasis on portfolio design and optimization. Element Relative Return Advantage: ~ 1.5 to 2.0%

4. Six Elements of the Approach  Element 3: Strategic Selectivity Two dimensions:  Leadership Quality Investing in Industry leaders that deliver superior growth and profitability. An “all-quality emphasis” in a Buy and Hold discipline typically leads to underperformance (overdose of B and H, poor size diversification). Through careful purchases and a willingness to sell under the right conditions, higher relative returns can be achieved.  Projected Annual Returns Purchase only at attractive prices. Element Relative Return Advantage: ~ 4%

5. Six Elements of the Approach  Element 4: Seek/Maintain Sufficient Overall Growth Unlikely to achieve superior returns without sufficient number of small and medium sized companies. Element Relative Return Advantage: ~ 3 to 4%

6. Six Elements of the Approach  Element 5: Strategic Selling Nicholson: 90% of selling decisions should be based on improving the portfolio. Constantly challenge the weakest holdings (lowest PARs) for replacement. Why hold a stock with a PAR < T-Bill or Money Market rates of return? Over long periods of time, the stock market is efficient. Distinctions may be made between Core and non-Core holdings. Element Relative Return Advantage: ~ 4%

7. Relative Contributions ElementRelative Return Advantage Ownership and Self-Direction1.5% Invest Regularly (Diminishing) 1.5% Strategic Selectivity4% Seek/Maintain Sufficient Overall Growth 3 to 4% Strategic Selling4% Dynamic Cash Allocation2.5%

8. Element 6: Cash Allocation  There is the mistaken belief that being fully invested means spending cash as quickly as it comes in. Does any business operate that way? We are in the business of investing.  Being 100% in stocks at all times means being dependent on deposits to make purchases.

9. Element 6: Cash Allocation  Being 100% in stocks at all times reduces portfolio effectiveness. We cannot “pounce” on stocks when on sale or use limit orders to improve Strategic Selectivity. Purchases are limited to newly deposited amounts, often resulting in holdings at less than minimum guidelines (eg. AFL and FCN recently). We are forced to sell to payoff departing partners (currently 10 members are < 5% ownership).

10. Element 6: Cash Allocation  How much cash to hold? This should be a function of the overbought or oversold state of the market, relative to expected performance. PAR (overall market) is a valid indicator. HIGH PAR = LOW CASH (we are buying as potential returns are high). BEAR MARKET: Everything is on sale (March 2009). LOW PAR = HIGH CASH (we are waiting for opportunities, Summer 2008).

11. Element 6: Cash Allocation Your portfolio cash allocation target (plus or minus, of course) should be a function of return expectations for the overall market (MIPAR). At the depth of bear markets -- think March 2009 and its 20% MIPAR condition -- we should have very little cash. The flip side is when MIPAR approaches multi-decade lows. Under those conditions, we’d like to have a stable of cash reserves for purchase opportunities during the ensuing correction or recession. As shown here, a simple linear relationship between MIPAR and the % of total assets committed is pretty straight forward. When MIPAR = 8%, portfolio cash equivalents should be approximately 15% of total assets. Based on the Cash Allocation Barometer graphic from the Article, with MIPAR currently at 11%, Cash Position should be around 10%.

12. Q: But isn't "hiding" in cash a breach of the "rule" that we remain fully investing? A: No. Not at all. In fact, most of the investing public would see the cash allocation recommendations discussed here to be very aggressive. In sharp contrast, many / most of us would feel "overly conservative" with 15% in cash at this time. Look no further than Value Line's current recommendation of 35% in cash equivalents. Assets invested in cash equivalents are still fully invested. In fact, to remain 100% invested in common stocks at all times is a path to weaker results. Reserves are important for the transitions from periods of overbought (low return forecast) conditions to the opportunities presented by corrections. Element 6: Cash Allocation

13.  Our business is investing.  Business budgets and plans.  We should also plan a cash position strategy and budget accordingly. Element 6: Cash Allocation