Interview with Frederic G. Marks, co-founder of Cheviot Value Management, Inc. What is Cheviot's investment philosophy? We seek capital appreciation by means of disciplined, value-oriented investing in common stocks. However, we also believe that protection of capital from loss is just as important as earning a good return on invested capital. So our philosophy excludes any course of risky speculation in pursuit of high returns. What is Cheviot's investment strategy? It is our strategy to take advantage of normal market fluctuations that afford opportunities to buy wisely when prices are low and to sell wisely when prices are high. When pessimism about stocks is at its maximum we know that we will have opportunities to purchase shares of the highest-quality companies at bargain prices. We are always vigilant to take advantage of such opportunities. What do you believe drives the market? In the case of individual companies growth or decline in earnings drives prices up or down. Our analytical work is directed towards identifying those companies capable of sustained growth in earnings. In the short term the human emotions of elation and fear, as well as the propensity to speculate, occasionally drive individual share prices and the stock market to extremes of over- and under-pricing. In the long term the overall market moves in response to basic economic factors, including the level of overall business activity, the productivity of our country, the amount of taxes imposed on businesses and investors, and the degree of inflation. What advice do you have for investors at this time? My advice now (and always) is to get educated about the investment process. Learn the critical difference between investment and speculation. Almost any motivated person can learn to be a successful investor while very few can be successful speculators. As the founder of Cheviot Value Management, what were your reasons for starting this business? Long before we started our investment advisory service we had legal clients seeking our opinion about investments they had made that had turned out poorly. I met with those clients to provide guidance on how to avoid losses due to poor decisions likely to lead to loss of capital. Eventually we saw that a significant number of our clients would welcome our undertaking the formal management of their investments as a business. Therefore, in 1985 we established our investment advisory business to invest on behalf of our clients pursuant to a value-oriented discipline designed to seek preservation of capital as well as long-term growth in value. Why did you leave your successful law practice to found a money management firm? We didn't leave the practice of law immediately, but continued to practice law as well as operate our investment advisory business. After four years doing both, my wife Nancy (who was also an attorney) urged me to concentrate on the investment advisory business because we both loved it so much. At that time (in 1989) we closed our law office. Who do you think are your ideal clients? Ideal clients for our firm have three characteristics. First, they do not want to do their own investing because they have other things to do that are more interesting to them. Second, the prospective client has realistic expectations about the results from investing. Third, they do not wish to speculate with their hard-earned capital. What are the risks involved in investing in stocks? There are two principal risks: The inherent risks of a company's business. The risk of the stock market itself. The first risk can be dealt with through intelligent analysis of individual companies plus diversification among a number of companies. The second risk, of the market itself, is that the share owner will buy and sell unwisely, under the influence of the emotions of fear or greed that sweep over the market from time to time. Knowledge and patience are the only tools for dealing with the risks of emotionality in the stock market. How do you invest your own money? At Cheviot Value Management we eat our own cooking. Other than our personal residence, most of our assets are invested in portfolios that resemble client accounts in every way, holding the same securities that our clients hold in their accounts. Is there any difference in your management of tax-exempt accounts versus taxable accounts? There are differences, but they are not particularly significant in the long run. In taxable accounts we try to offset realized gains with realization of losses, but that is not an issue with a tax-exempt account. There is one factor about retirement accounts that has a slight effect on our investing. That is the exemption from tax on dividends and interest for as long as funds are in the retirement account. Therefore, investment returns from interest and dividend income in retirement accounts don't add to current tax liability, and that is a factor we take into account. Are your clients truly treated as individuals, or are they thrown into broad categories? Each client account is absolutely individual in every respect in that we take into account the client's personal objectives, age, needs for income from the account, etc. We buy and sell securities for each account on an individualized basis according to the client's personal objectives and needs. How does your relationship with clients continue after they come aboard? That depends on the desires of the client. We are always available to every client to discuss his or her account, to meet with the client, and to provide reports and information. However, we find that some clients want frequent contact via telephone or in person, while others seem not to require that. I've interviewed a number of different investment advisors. What makes your firm different than all the others? There are several factors, listed below, that may differentiate our firm from many other investment advisors. We are large enough to have the resources and provide the services of organizations that are far larger. And we are small enough so that our clients can always deal with the principals of the firm. We are compensated solely by fees paid by the client. We do not receive any commission or other compensation on account of buying or selling securities. Our fees are moderate. The totality of the fees plus brokerage commissions to the account custodian is less than the totality of costs of the typical mutual fund. Charles Schwab & Company is the custodian for our clients' accounts. We are not compensated by Schwab in any way for sending them business. We do not use mutual funds, for the most part, for three reasons: (a) doing so would add an extra level of costs for investment management, even with no load funds; (b) for taxable accounts mutual funds have inherent, unavoidable tax disadvantages; and (c) we are not impressed with the way most mutual fund managers operate. Our sense of responsibility to protect our clients' assets from permanent loss guides every decision and action that we take in the operation of our business. Do you have any parting words for those who may consider your firm's services? Yes. Investing is endlessly fascinating to us. We never tire of investing and the investment process. So if you are considering our services, just remember that this is more than a business to us. It is our favorite thing to do. And we bring just as much enthusiasm to our clients' investments as we do to our own.