INVESTMENT PROCESS We invest in good companies that are run by shareholder-oriented managers and that are selling at a discount to a growing intrinsic value. Equity Portfolios The investment strategy employed in building equity portfolios is value-oriented.  Portfolios typically consist of 15-20 stocks that are carefully selected based on internally generated research and investment ideas.  Portfolios are not constrained by market capitalization considerations.  Turnover tends to be quite low.  In a typical year we might buy and sell 2-4 positions.  Our average holding period is measured in years. The minimum initial investment is $500,000 in cash and/or securities. Buy Discipline New investments must meet the following criteria: Good business A good business is one with unique competitive advantages that generates excess cash flow above that needed to maintain its infrastructure.  Such a company may have more power to raise prices for its goods and services.  It is even better when that company has a conservatively financed capital structure.  While each of these elements is not present in every investment that we make, these are the characteristics for which we diligently search. Shareholder-oriented management Such managers make decisions for the benefit of all shareholders equally.  Additionally, the team is oriented toward carefully allocating corporate capital to its best use.  Managers are focused on becoming more efficient and more profitable rather than simply making the company larger. Discount to value Investments are made when the market price of a stock trades at a 40-50% discount to our estimate of the company’s intrinsic value.  We use two methods to assess value.  The first estimates the liquidation value of a company given private market transactions for similar assets and liabilities.  More often we use a discounted cash flow analysis to estimate a company’s value as a going concern.  Often when a company’s stock price trades at a steep discount to value, our decision to buy runs counter to prevailing market psychology.  Adherence to this process moves investing from an art to a discipline. Growing business value A company selling at a discount to value is not reason enough to make an investment.  The company’s management team must be focused on increasing that value.  Sell Discipline We generally sell a portfolio holding for one of the following reasons: Stock price has reached fair value or overvaluation When the price of a stock goes up to fair value it is time to sell.  The prospect for further capital appreciation is diminished and, more importantly, the risk profile of the investment has increased.  At times, we continue to hold stocks that are trading near intrinsic value as long as intrinsic value is increasing. Business intrinsic value deterioration The prices of common stocks fluctuate (sometimes wildly) for a variety of reasons.  While this may be disconcerting, mostly these fluctuations are not taken seriously.  Instead, we remain focused on changes in intrinsic value.  The erosion of value, however, is another matter.  Such occurrences may result from poor capital allocation decisions, permanent threats to future earnings power from an external source, or other reasons. These types of devaluations are evaluated thoroughly and usually result in a sale of the position. Performance Banyan calculates performance for each portfolio monthly and provides written quarterly reports to each client.  Banyan’s equity composite performance dates back to 1991. Mutual Funds Mutual funds are used to provide specialized asset allocations, such as international or fixed-income exposure, for a balanced portfolio.  Funds also serve to accommodate modest sized, add-on accounts for existing clients. Key characteristics of the mutual funds we purchase are: Fund managers share a value-oriented investment philosophy Banyan seeks out mutual funds whose managers share our long-term, value-oriented approach to investing and have a solid track record. Funds have a low expense ratio Banyan chooses those mutual funds with operating costs that are low as a percentage of total assets. Also, we do not invest in funds that have hidden or back-end charges (1) . International funds When investing in international funds we may utilize those funds that seek to enhance returns by assuming some currency risk.  Fixed-income funds selected to generate higher total return The funds we select to meet the needs of our fixed-income clients are those in the multi-sector category.  While these funds are chosen to reduce interest rate risk, they are subject to increased specific issue risk and may be more sensitive to changes in the economic cycle.     (1) Some client capital is invested in a fund with a 2% redemption fee if sold within 90 days of purchase.