Tocqueville is comprised of an experienced group of contrarian investors who adhere to a traditional value investment philosophy. Our primary objective is to preserve our clients' long-term capital from the erosion caused by the combined forces of inflation and taxes. In recent times, this has come to be perceived as a modest goal, but over the long haul, as we have pointed out, it is a significant challenge. Of course, we strive to achieve the very best performance possible but always within the framework of capital preservation so as not to risk our clients' standard of living.

Even the benign inflation rates that have prevailed over the past decade can have a pernicious cumulative effect on the value of capital. Ten years of modest inflation, averaging 3% annually, reduces the real purchasing power of capital by 35%. Since most Tocqueville client relationships span generations, our focus on capital preservation is paramount. Factoring in taxes from a variety of sovereignties, we conclude that purchasing power cannot be preserved unless capital increases at almost twice the rate of inflation. Only common stocks have offered these types of returns over the longer term. While we are experienced in fixed income and do include bonds and preferred stocks when a client's circumstances warrant it, Tocqueville emphasizes equities.

Still, the first rule in preserving capital is not to lose it. It is unlikely that we will take what we perceive to be risky bets with our clients' capital, regardless of how great the potential reward. At times, this has put Tocqueville at odds with an industry obsessed with relative performance. Portfolios are increasingly measured against indices such as the Dow Jones Industrial Average or the S&P 500 Index, but we measure our success in how well we protect our clients' capital and standard of living.

Beyond the cautionary cash reserves previously mentioned, it is vital to our discipline that we keep our clients invested. Only by staying invested over the long term can our clients participate in the increased valuation of equities over time.

Keeping our clients comfortable enough to stay invested - especially when the market experiences heightened volatility - requires helping clients understand the dynamics of the markets and the rationale of our investment strategy. We accomplish this through periodic newsletters, articles on our web site, meetings, and frequent phone calls.

Value Contrarians

Our investment style - which we label contrarian value - is the key to our dependability. Contrarian value investing is a conservative approach that is outside the mainstream investment community. Everyone wants to own companies with revenues and earnings that are growing appreciably. We certainly are not opposed to growth. Indeed we embrace it; a company that consistently grows its earnings, cash flow, and book value, is highly desirable. The rub is the price that the market traditionally assigns to growth. Except for those occasional periods when the opportunity to invest in growth presents itself, the market typically assigns valuations for predictable growth that are too rich (in our estimation) and therefore too risky for our conservative clientele.

While investing against the consensus typifies our style, it is not the whole story. Sometimes the consensus is right! In order for Tocqueville to take a position in a given security, we must be convinced that it presents intrinsic and overlooked value. We look for value in a company's balance sheet, in its ability to generate cash, the durability of its franchise, and the viability of its long-term strategy. Unlike most of Wall Street, we are not as concerned with a company's near-term earnings outlook. In fact, several of our portfolio companies have become cheap either because of an earnings shortfall or a temporarily depressed earnings outlook. When Tocqueville invests, we recognize that we are investing in businesses, not in stocks. Therefore, we focus more on the longer-term earnings power of a business franchise. Opportunities caused by disappointing short-term expectations are grist for our mill. We also like to see a catalyst for positive change in an investment situation, but we are patient. If we become convinced the value is there, we are willing to wait for a catalyst to emerge. Frequently, this can be a change in management or management philosophy. Finally, we tend to invest well ahead of others, when the outcome we envision is not yet priced into the stock. If correct, consensus opinion will rally and the stock price will increase - hopefully over a prolonged time period.

Investment Process

We maintain an inventory of well-researched investment ideas at all times. However, an investment idea becomes a portfolio position after a process that typically includes:

• Thorough research of publicly available information
• Canvassing of analysts, experts, and professional "friends" of ours who are familiar with the company or at least its industry's dynamics
• Conversations with the company's customers and competitors
• Manufacturing facility and headquarters site visits, as well as frequent phone discussions with management
• Ongoing discussions by our investment committee at our weekly, internal investment meetings

Portfolio positions are monitored on a regular basis to ensure the original investment thesis remains intact. To accomplish this, each stock in any Tocqueville portfolio has a sponsoring manager who is responsible for monitoring events that might affect a particular investment thesis, with particular attention to changes in:

• The company's structure (acquisitions, divestitures, financial restructurings, etc.)
• Market price, economic or financial conditions
• Management, customer or shareholder constituencies, or
• Corporate strategy

So much for our approach to buying and monitoring investments, but what about selling them? Any value investor will tell you that the sell decision is the most difficult part of the investment process. At Tocqueville, unlike many of our peers, we believe that a price increase in a stock is not reason enough to sell. One criterion for buying into a position - in addition to low downside risk - is the possibility of doubling a client's money over a three- to five-year period. As long as such potential remains, even if the stock has already appreciated significantly, we will continue to hold the position. Our relatively low portfolio turnover (far from being a sign of inactivity) indicates the significant research we do on companies and the high comfort level that develops when we know a company well.

Ultimately, we either sell when we feel a company's earnings potential has run its course, or when it has been embraced by the investment community to such an extent that the potential for favorable surprises has been eliminated. We will also sell stocks for other reasons such as if a position becomes too large. No matter how attractive a company's prospects, we are uncomfortable holding disproportionately large positions relative to a portfolio's overall holdings.

"We are committed to investing our personal assets along with those of our clients."

Finally, integral to our investment philosophy is our commitment to investing our personal assets along with those of our clients. We expect our senior partners - indeed, all of our employees - to invest alongside our clients. We feel strongly that exposing our own capital to the same investment decisions we make on behalf of our clients helps focus the mind, making us less susceptible to outside distractions and more sensitive to risk.

 

Tocqueville Asset Management LP
40 W. 57th Street 19th floor New York, NY 10019 212-698-0800