Investing in Individual Securities with Little Risk of Permanent Loss of Capital: Expert Money Manager Chris Welch Discusses the Risks Associated with Investing in Mid- and Small-Cap Stocks

Wall Street Transcript

67 WALL STREET, New York - August 5, 2013 - The Wall Street Transcript has just published its Deep Value Investing Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Bottom-Up Stock Selection - Value Oriented Strategy - Value Investing - Deep Value - Small Cap Investing

Companies include: American Equity Investment Lif (AEL), Willis Group Holdings Ltd. (WSH), Southwest Airlines Co. (LUV), Juniper Networks, Inc. (JNPR), Freeport-McMoRan Copper & Gold (FCX), Staples, Inc. (SPLS), Radian Group Inc. (RDN), Best Buy Co. Inc. (BBY), Office Depot, Inc. (ODP), Amazon.com Inc. (AMZN) and many more.

In the following excerpt from the Deep Value Investing Report, an expert portfolio manager discusses his investing methodology and top picks:

TWST: What are the risks specifically associated with investing in mid- and small-cap stocks, and what is your strategy to manage those risks for your fund?

Mr. Welch: We define risk as the permanent loss of our clients' capital, and that's an important starting point when we talk about risk. That's as opposed to defining risk as price volatility or its variability versus the benchmark. So in terms of benchmark, we have no minimum investment that's required for any sector.

We only invest in individual securities that we think are attractive. In terms of price volatility, we're willing to endure price volatility in stocks if we think that there is little risk of permanent loss of capital, and so there are a couple of examples from the financial crisis. Juniper Networks (JNPR) and Freeport-McMoRan Copper and Gold (FCX) were stocks that we bought during the down part of the financial crisis back in late 2008, early 2009 that had tremendous price volatility.

But they were very strong franchises with balance sheets that we thought were protected enough that they, in the case of Freeport-McMoRan, could continue to service their debt, as well as meet their maintenance capital expenditures, with a very strong franchise as a vital commodity producer looking forward over five years.

So the most important part of risk for us is ensuring that minimal chance of permanent loss of client capital. Now when you're dealing with small and midsized stocks, some of them have a lot of growth opportunities, some of them on the midcap side of things have a little more scale so they have some cost-savings and some durability there.

But there can be some risks, whether it's from the balance sheet or just from the small size and competitive nature of some of these industries. So we're very careful about the types of companies and businesses that we invest in as well as the prices we...

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