Q: What is your investment philosophy?

A: The Bullfinch Western New York Series is a regional mutual fund that invests only in companies with a significant economic presence in Western New York State.

We employ a traditional value investment philosophy with a behavioral finance twist. When we do our initial screening of stocks, we are not looking at prices but we're looking for sound financial statements. We define value primarily by the strength of the balance sheet and the quality of income statements.

Once we get a candidate list of stocks, we start looking at historical price ratios and start getting more into the behavioral side of things - how the market is reacting to various company developments and how that might impact the short-term trading of a particular stock.

Q: How does this fundamental view help you to build your investment strategy?

A: It allows us to be consistent in our practice year after year. We're not chasing investment fads or stocks that are sought by momentum investors. We are looking at fundamentals of business and look for investment merits based on balance sheets.

Q: Could you define Western New York State?

A: When we started the fund with that name, we had to specify the counties within that state. So we had a list of the 14 Western counties and, interestingly, on a map it's virtually a straight line halfway between Rochester and Syracuse going down from Lake Ontario to the Pennsylvania border and everything west of that is considered Western New York State for this fund.

I also believe that if you just look at a smaller list of stocks, you are going to be more focused and it might be easier to find out when opportunities arise. We are all native Western New Yorkers and we thought there would be an opportunity for us to do very well with a small group of stocks.

Q: What makes investing in Western New York companies attractive?

A: These are stocks in our own backyard. We are constantly inundated by the local press with the news on these stocks and we're able to see superstar stocks before the rest of the industry sees it.

I can give you a good example - we started investing in Graham Corp. years ago. It was a good stable company in terms of the value prospects, really small, though. It wasn't noticed by Wall Street because a lot of the screens have minimum market cap values. And when the oil prices started to rise, all the oil companies went up and the rest of the market started looking at other companies that would have an advantage due to the rising oil prices. They eventually came down to looking at companies like Graham and, when there are not a lot of companies with huge upside potential in a very popular area of investing, that puts a lot of demand on the stock. The stock price has shot up as the oil prices have risen and the company continues to grow with the growing market.

Q: How is your research process organized?

A: We have access to a database of thousands of stocks. As we are multi cap, we have to look at all the available stocks that we can purchase. Our first screen identifies companies that have a significant presence within the Western New York State. That brings our investible universe of 9,000 stocks down to 250, so it doesn't give us a lot of choices.

We will do screening on that database based on the company records. We are looking for very strong fundamentals such as very little debt, fairly significant working capital to long-term debt ratio. That screen will give us what we'll call our classic value stocks or candidate lists.

There are stocks that don't quite click on all cylinders but come really close. They could be a more defensive or income-oriented type of stocks, generally with a higher yield, but with a lesser return prospect. On the flip side, we have opportunistic stocks, which are riskier than their peers, but have greater return prospects.

Q: Could you give us a historical example to illustrate your investment process?

A: A company like Corning, for example, would not have passed the screen based on the debt levels. We looked at the company as we knew what was going on from the broader market behavioral perspective. We saw everybody dumping the stock because of fears of bankruptcy. Our own research was saying that the probability of bankruptcy was very low. The market knew Corning as a fiber optic company but we saw the company having a small market position in the flat panel display market. From a behavioral standpoint, the stock price got pushed down and we saw that as an opportunity which turned out to be a good investment when LCD TV and then HD TV became popular.

I will give you another example from a topdown macroeconomic perspective. In the years coming up to 2000 when technology stocks were taking off, earnings were growing tremendously. We sold off a lot of our technology stocks by the end of 1999 with the idea that a lot of the earnings push that we were seeing in 1998 and 1999 was caused by the year 2000 (Y2K) compliance concerns. Most companies were overbuying technology; and this meant that in the years following 1999 those replacement cycles would be more extended. So we were able to sell off all our technology companies that we owned prior to the crash in the technology markets in 2000.

Q: What is the industrial scenario in Western New York? Do you see any kind of leadership?