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    Guest Interview:

   James Investment Research

    PO Box 8
    Alpha,OH 45301

    Telephone: (937) 426-7640
    Fax: (937) 426-7097


    Interview Quarter: 1Q2009

 Barry R. James, CFA, CIC

 President & Portfolio Manager

  Barry, please tell us the history of your firm beginning with its founding in 1972.  
  The history of James Investment Research truly begins years before its founding in 1972. My father Frank graduated from college and entered the U. S. Air Force in the 50's, and after a time he opened a brokerage account with his modest savings and began investing in stocks based on Wall Street research. The mixed results perplexed him. He noted that stock price movement offered a profit opportunity, but he was not able to achieve consistent success using Wall Street research.

The roles of Air Force navigator (50 missions over Korea) and later a tour in Vietnam, husband and father of 3 boys kept him from further intensive work on this conundrum until the mid 60's. At that point, the Air Force sent him to Rensselaer Polytechnic Institute and designated him to teach graduate statistics at the Air Force Institute of Technology (AFIT) on the Wright Patterson Air Force base in Dayton, OH. At Rensselaer he choose to study stock price trends as his dissertation study.

With faculty support, he was able to procure a data tape with every trade executed on The New York Stock Exchange from 1926 to 1960 and was able to identify common characteristics that tended to be shared by stocks before upward, sideways and downward price movements. His dissertation, "The Implications of Trend Persistency in Portfolio ManagementĒ is a seminal work in the development of relative strength, a tool used by us at James Investment Research and others worldwide to this day.

His dissertation uncovered strong evidence refuting the random walk hypothesis of efficient markets. At that point, having been an actual investor for years, he further explored moving average investing and discovered a special effect he called ďReinvestment AveragingĒ which showed further profit possibilities. He was awarded a doctoral degree in 1967 and reported to Wright Patterson Air force Base as a member of the graduate faculty, serving as Chairman of the Quantitative Studies department and then Director of the Graduate Education Division.

While teaching at AFIT, he naturally began augmenting his lectures on statistics with examples from his dissertation, until a fellow faculty member asked Dr. James to work part time at his local Dayton money management firm. Dr James began to manage portfolios in late 1972, right at the top of the bull market, and the Dow touched 1,000 one month later, then embarked on a bear market taking prices down almost 50%. His skill and expertise in fund management and the application of research principles served to largely conserve client capital and was a major boost to the new business relationship.

The research and portfolio management duties were performed at James Investment Research, a tiny firm which at first was run out of our suburban Dayton home. I became an expert in charting, a chore I would handle after school. My brother recounts that he had to vacate his bedroom even on days off from school, as it was an office by day. The first SEC exam took place at our dining room table. Assets under management grew by word of mouth with the first goal being to afford a computer so that the tedious work of managing portfolios could be sped up via automation.

Continued successful portfolio management brought assets of this unlikely firm to $1.1 billion in 1997. As criteria in the model favored, among other factors, positive and growing earnings, the dot com stocks so beloved by Wall Street in 1998 and 1999 were shunned by us as a bubble sure to burst. Clients unable to resist the siren song of "the new paradigm of eyeballs versus earnings" left in droves until assets under management bottomed at $475 million in 2003. To our credit, we didnít lay anyone off during this asset attrition. The company's directors recommended a heavier emphasis on marketing. Hiring a marketing director, shifting from a regional to a national focus, putting the proper distribution plan in place for the Firm's no-load mutual funds, and retaining a public relations firm helped assets under management to mushroom to $2.1 billion over the ensuing 5 years. Our strength in preservation of our clients' capital has recently been recognized by Barron's and Lipper.
  Who has been the guiding influence behind developing your investment research program?  
  The guiding influence has clearly been my father, Frank James. He was aided in the early years by my older brother Frank III. Currently, my younger brother David, as Senior Vice President of Research and I, as President/CEO continue to develop, test and utilize our research program alongside our father. Since 1972, one of us, on a rotating basis, has performed our weekly market analysis and written commentary for both the stock and bond markets to guide our portfolio managers. That totals over 1800 weekends; clearly research is a passion of ours.  
  Is your investment research strictly used in-house or do you share or sell it to others?  
  In the Firm's early years, there was a view towards selling our research, but that never really got off the ground, to borrow a Wright brothers analogy since we are based here in Dayton, OH. Our investment research almost exclusively used in-house, however, we do share certain aspects with others. As mentioned, commentaries on both the stock and bond markets are written each weekend and delivered to the 7 members of the Investment Committee each Monday morning at 9:10 during a stand-up meeting in Dr. James' office. All remain standing so as not to get too comfortable and miss the opening bell at 9:30. These are the PM's marching orders should a shift in asset allocation have been made, or a change in the duration targets of our bond holdings. We also discuss any change in the market cap or sector weightings of our stock portfolios. Anyone may sign up at to receive these comments via email around 10AM each Monday. This is a complimentary service. I believe about 3000 individuals and investment professionals currently get the reports. They are short and to the point, because if I am going to work my share of weekends, I'm not about to write a book each time.

We further research content for a daily radio report delivered at 8:30AM on both AM and FM radio here in Dayton and in Richmond, IN. These are about 10 to 12 minutes in length and cover the economic news of the day as well as our thoughts about using the information. We explain what to listen for and what to do based on the numbers. The broadcasts are then made available on our website,, where they can be accessed globally 24/7 for one week. Many investment professionals tell us they listen to these each day to help develop investment strategies as well as for talking points with their customers.
  What is the core of the Firm's investment philosophy?  
  At James Investment Research, we know that capital preservation in down markets is actually more important maintaining and growing wealth than is peer-besting performance in up markets. Applying the classic Aesop's fable to investing, it is our philosophy that the tortoise wins the race. As so many learned in 2000-02, and then relearned in 2008, if your portfolio declines by 50%, you need to double the remainder to get even. At normal historic rates of return, some do not have enough years left to accomplish this. Fully participating in a bubble, by, for instance, chasing dot coms in 1999 or real estate in 2005-06, requires ignoring risk and we do not believe anyone ever hired us to ignore risk with their money.  
  Your balanced portfolio garners most of your managed assets. Do you have an asset allocation strategy that guides you?  
  Absolutely, and it is quite proactive. We note that some balanced managers reset their asset allocations at the end of a time period to preset levels. This is not unlike driving a car looking through the rearview mirror. We try to drive looking through the windshield. We set our allocations proactively to lower risk, consistent with our investment philosophy. Data are gathered at the end of each market week on over 100 macro economic factors. Some are short or long term in nature, but most are intermediate term indicators. We determine whether each is favorable or unfavorable and we are guided by the weight of the evidence in setting our allocation levels. We typically make 5% shifts and then continue to revisit the factors each weekend to see if more shifts are warranted. Over the decades, this discipline has tended to cause us to be early in our shifts, but has helped us avoid a lot of big potholes.  
  What other types of investment products do you offer?  
  In addition to our balanced product, we offer fixed income, all-cap equity, large-cap equity, mid-cap equity, small-cap equity, micro-cap equity and market neutral products  
  For your investment process you use a top down approach. Please review for us how your investment model works.  
  Beginning soon after Labor Day, work begins on our Economic Outlook for the coming year. Our Outlook covers the US Economy, Stocks, Bonds and International. Dr. James, David and I rotate covering the Economy, Stocks and Bonds each year, and our Senior Vice President and Portfolio Manager Tom Mangan covers International. In today's complex world, there are always positives and negatives for each section, and we identify as many of each as we feel are important. After carefully considering the pros and cons, we formulate our forecasts. These are vetted by the entire Investment Committee throughout November, and our formal Outlook is presented to our institutional and high net worth clients in December and to our James Advantage Funds shareholders in January. Make no mistake, though, this is not a side exercise for the enlightenment of our clients, the Outlook is our blueprint for how we will position portfolios for the year. Then, as previously described, asset allocation levels, average bond duration, and stock capitalization levels and sector weightings are fine tuned each week throughout the year.

For actual stock selection within the capitalization and sector weightings, we employ a bottom up approach. The findings of my father's dissertation and our continued research over the past 3 decades have been refined in to a stock screening discipline that we run on over 8000 companies. Our factors fall into three categories, relative value, earnings and relative strength. Each stock earnings a ranking between 1 and 100, with a #1 ranked stock representing a "bargain stock" worthy of further qualitative review. In all this we look for relative value, positive and growing earnings, good relative price strength, preferably Wall St. neglect and management confidence. A stock ranked 100 would be the mirror opposite; possibly not making money, no votes of confidence on the part of management, poor relative price strength and trading at relatively high prices because Wall St. is in love with its potential. While it cannot represent actual performance, the attached chart shows the performance of stocks with different ratings.

Every component of our research is reevaluated at least every other year to see how well it has been aiding us. Those components that have been more helpful will have their weighting in the overall process increased, while those that have lost some of their predictive luster will see their weighting decreased. Weightings are adjusted via exponential smoothing so as to never totally discard nor overweight a factor just because of its recent value to us.

So how does all this work in practice? Let's assume a portfolio manager notes that his/her accounts do not own enough mid cap basic materials stocks to match up to the weekly research guidelines. (S)he further sees that no names on the Buy List fit the bill. After identifying all mid cap basic materials stocks well ranked by the model, (s)he will gather 2 additional port managers and/or research analysts around a Bloomberg terminal and decide which names to go to present at our next (twice-weekly) Investment Committee meeting. A 20-page report is prepared and delivered to the 7 IC members no later than the evening before the next meeting. Each is responsible for coming to the meeting up to speed on the candidate stock, ready for a rigorous debate. After said debate, a simple majority vote will place a stock on the Buy List, move a name from the Buy to the Hold List or from the Hold to the Sell List. Voting takes place in reverse order of seniority so the less experienced employees cannot coattail the more experienced ones. Portfolio managers must work from these lists in the management of their ports, however, they have time and price discretion. Some use technical analysis to aid them with timing and price points.

While any PM may call for a review of and a new vote on any name at any time for any reason, reviews are automatic for Buy List names if their ranking falls out of the top quintile, and Holds whose ranking slips below 50.
  How do you manage the fixed-income portion of the portfolios?  
  Again, conservatively. For us, fixed-income vehicles are "not stocks," i.e. a place to be when our research suggests equities are trading at high, risky levels. We therefore tend to prefer US Treasury securities of intermediate duration. Long Treasuries were instrumental preserving capital in 2008, but we realized that they would not help us as much in 2009. We researched and instead are employing sovereign bonds, high quality corporate bonds and even some municipal bonds that are government obligations. At some point in the coming years, we will add even more Treasury Inflation Protected Securities, or TIPS, as the massive stimulus program will likely lead to higher inflation.  
  How important do you think stock picking versus asset allocation is to your client's overall returns?  
  Obviously, asset allocation is the most important decision. Last year less than one in ten stocks rose in value while treasury bonds were about the only bonds that advanced. History shows the allocation decision is the most important one. However, when it comes to the difference between sectors and individual stocks, we have found the individual stock is much more important in achieving above expected results.  
  How does a rapidly changing economic outlook affect your investment strategy?  
  Good question. Fortunately, the research efforts we have refined over the last 36 years are forward looking. As a result, we tend to be more anticipatory and reactionary to current events. Historically, we have found that fundamentals actually drive the markets while the pundits usually ascribe the moves to some recent revelation. Our research has been particularly helpful in identifying lower risk periods, like we saw in early March. However, the longer term risks remain high and that drives our overall allocation structure rather than trying to chase a short term rally.  
  What risk parameters do you look for in your weekly risk reports?  
  We basically look at four general areas to try and identify risk levels. First we look at the economy and if a statistic is released during the week, by the US, state or a local government or by an association, it is likely that we look at it. After all, the stock market tries to anticipate the future of the economy and thereby it is necessary to look at it. Second, we look at monetary items and interest rates. Third, we look at sentiment readings, typically using it in a contrary fashion. Lastly, we look at internal measures of the market to get a feel for the health of market moves.  
  What do you look for in a stock or bond that would define it as cheap and therefore a good buy?  
  We prefer "bargain" to "cheap;" it just sounds less cheesy! For stocks, we look for well-run companies with positive and growing earnings; management confidence in the form of open market purchases with their own money, not cashless exercises and sales of stock options, or in the form of stock buybacks where the shares are retired, not just held for stock option programs; good relative price strength vis-ŗ-vis peer companies and stocks overall; trading at reasonably low prices as measured against earnings, cash flow, book value etc. The fewer Wall St. analysts the better. We use bonds as a place to be out of stocks, not as a primary tool for appreciation, so we want safety and do not go down the credit quality scale. However, certain sectors of the bond market can be mispriced, as evidenced through excessive yield spread above treasuries.  
  Please explain your small cap value product.  
  By the mid-90's, many of our institutional clients had hired consultants who summarily took the asset allocation process out of our hands and began to hire specific large, mid or small cap equity managers, fixed-income managers and managers of alternatives like derivatives, commodities, and real estate. In this changing landscape, we needed to identify our differentiating strength. We noted that our unique, proprietary research produced better results the smaller the market capitalization, so we decided to create a small cap value product. It employs exactly the same methodology, techniques and discipline as our all-cap equity product, but we limit it to stocks within the capitalization of the Russell 2000. We automatically sell the stock if it grows larger than the capitalization range in the Russell 2000. Nevertheless, our typical capitalization is much lower than that of the Russell 2000.  
  Please explain all the ways you limit your clients' downside risk.  
  Let me begin my answer by explaining what we don't do. We don't use stop loss orders or sell because a holding has fallen by a given percentage. We continue to monitor all publicly traded companies daily for price movement, and twice a month via our rating system. We typically buy 1.5% positions, and trim holdings that grow to more than 8% of portfolio values. Maintaining a presence in all sectors and proactively setting sector weightings further limits downside risk. We maintain a caution list of small and micro cap stocks and generally limit our exposure to no more than 5% of shares outstanding and/or 5 days of average trading volume. We conscientiously monitor our capacity to manage assets and will close any product when it becomes evident that the results of our long-term, loyal clients would be diluted by any additional assets.  
  How much of your analysis is "quantitative" versus "qualitative?" In other words, do you make decisions strictly by the numbers or do you allow for a degree of common sense to guide your investment decision making?  
  A 30,000 foot examination of James Investment Research may well lead to the conclusion that we are a quant shop. In fact, we merely let our computer models narrow down the universe of over 8000 publicly traded companies in America to a more manageable top decile of 800 potential buy candidates upon which to perform extensive qualitative research before a name could ever end up on our Buy list. We wrote all of our own research software, so while it may appear quantitative, it was all created with sound, qualitative common sense. Likewise, we use technology to improve our productivity and better monitor process and results.  
  Please explain why you favor sector analysis over fundamentals in picking stocks.  
  Because it is less risky than overweighting in various sectors just because fundamentals say they are cheap. Just think of finance stocks in 2008, they were cheap but our discipline kept us from overweighting this area. In fact, it led us to underweighting finance stocks.  
  You appear to be more of a "value" versus "growth" stock selector. Please explain the difference and if you favor one over the other.  
  A value investor wants to pay 50 cents for something worth $1 to him. A growth investor may also view the asset as being currently worth $1, but is willing to pay $1 because he believes that its ability to grow will soon make it worth $2. Value investing is more the tool of choice of capital preservers, whereas growth investing is more often employed for capital appreciation. While we may be considered more of a value investor, we do consider earnings as an important item for consideration. It is important to note, however, that we are relative as opposed to absolute value investors. An absolute value investor will stay in cash when (s)he cannot find stocks trading for less than their perceived value. We remain fully invested in stocks representing relative if not absolute value. Also, please be reminded that fully 35% of our criteria are based on positive and growing earnings.

We further note how each camp works for and against the other throughout a market cycle. Coming out of a bear market/recession, value investors are happy buyers of stocks trading at discounts to their perceived value, while growth investors haven't begun seeing the growth in earnings they so cherish. As the economy and market expand, discounts to perceived value dry up via market appreciation to the point where value investors are no longer willing to buy and may look to begin selling. Earnings may have begun to grow, causing growth investors to gladly buy from value investors. As the economy and the bull market mature, earnings growth may begin to slow. Value investors certainly won't pay above perceived value, so growth investors must find growth investors even more optimistic than they are to sell to. This is also known as the greater fool theory. Over the course of the market cycle, value investors have a natural crowd of investors willing to help them book their profits, growth investors do not.
  With the market's rapid decline in 2008, do you think balanced portfolios might become more popular with investors, versus portfolios consisting of only stocks?  
  As I analyze net purchases and redemptions of the Funds within The James Advantage Funds family, there is no doubt that balanced portfolios are becoming more popular. Financial intermediaries such as consultants, brokers, registered investment advisors and financial planners perform the balancing function at their clients' portfolio levels, using stocks and bonds or specialized mutual funds. More often than not, however, new clients tell us they never heard from their intermediary to recommend or take risk-lowering action. Tax consequences of the change oftentimes overrule. Another pitfall is emotion on the part of both the intermediary or the client. Buying low and selling high is probably the most often quoted yet hardest to practice clichť in the world. This is because it is scary to buy low, since bad developments have caused others to fearfully sell assets down to low levels. Conversely, selling high involves stepping away while the party is in full swing, never much fun. It's not that we aren't fearful when we buy and don't wish we could greedily hang around when we sell. We simply force our heads to overrule our hearts, because we know that we know that no trend lasts forever, especially nowadays After all, employing the discipline to actually buy low and sell high is what we were hired to do in the first place.  
  Please list James Investment Research's major principals, their backgrounds, and their day to day functions within the firm.  
  Frank James, Ph.D, is the Founder and Chairman, and CIO of James Investment Research. Dr. James earned his Ph.D. from Rensselaer Polytechnic Institute in 1967. Dr. James is a lead manager for the Balanced product. His dissertation, The Implications of Trend Persistency in Portfolio Management, provided a computer-based study of the price movements of every security listed on the New York Stock Exchange between 1926 and 1960. The results of his research in identifying securities with high probability of future appreciation continue to be used in the firm today. Dr. James was formerly in charge of the graduate management program, and a professor of Management and Statistics, at the Air Force Institute of Technology. His current responsibilities include overseeing the company's innovative investment management and research, and managing the firm's legal and financial matters. Dr. James maintains the firmís dedication to providing its employees with a productive work environment supported by state-of-art technology.

Barry R. James, CFA, CIC is President and Portfolio Manager with James Investment Research. Barry received his undergraduate degree from The United States Air Force Academy and his Masterís Degree from Boston University. He joined James Investment Research in its beginning years before a tour of duty as an officer with the United States Air Force. He returned to the company in 1986. Barry currently oversees the management of James Investment Research and is a senior member of the Investment Committee.

Thomas L. Mangan, MBA, CMFC is a Senior Vice President and a Portfolio Manager. Tom is a graduate of The Ohio State University and earned his MBA from The University of Notre Dame in 1974. Tom had over 20 years experience in trading and portfolio management, including positions in New York, London and Chicago before joining James Investment Research in 1994. He was Senior Vice President at Fuji Securities in Chicago prior to joining James. Tom is Director of Fixed Income and a member of the Investment Committee. In addition, Tom is Vice President and Chief Financial Officer of the James Advantage Funds. He is also the Fundís Chief Compliance Officer. Since 2000 Tom has served as an adjunct professor at Wright State University.

David W. James, CFA is a Senior Vice President and a Portfolio Manager with the firm, and serves as an Investment Committee member. Davidís responsibilities include a variety of research projects and statistical analysis. David started with the firm in 1981 and helped develop our computer model for screening stocks.

Ann M. Shaw, CFP, is Chief Operating Officer and Portfolio Manager. Ann is a senior member of the Investment Committee and is involved in security analysis and client service. She received her Bachelorís Degree from Capital University. Annís CFP designation brings essential knowledge and expertise to our individual client base. Annís management responsibilities include overseeing the day-to-day operations of the company, including human resources, MIS, trading, clearing and administration. Ann has been with the firm for 29 years.

R. Brian Culpepper, MBA, CMFC joined the firm in 1995, and serves as a portfolio manager and serves as an Investment Committee member. Brian assists in research and helps analyze stocks and mutual funds. He is a graduate of Wright State University in Dayton, Ohio where he earned a double Bachelor of Science degree in Management Information Systems and Management. Brian received his MBA from Wright State University in 2005 and the Chartered Mutual Fund Counselor designation from the College for Financial Planning. Brian has been with the firm for 13 years.

Brian Shepardson, CFA, CIC, has been with James since 1999 when he was hired as DTC administrator. Brian is also a lead manager for the Balanced product. Since that time, he has taken on many additional duties including analysis of stocks, bonds and mutual funds. Brian was promoted to a Portfolio Manager having earned his CFA designation in 2003. In addition to the Chartered Financial Analyst designation, he has also earned the Chartered Investment Counselor designation from the Investment Counsel Association of America and Chartered Mutual Fund Counselor from the College for Financial Planning. Brian obtained his BBA from the University of Cincinnati in 1996. Brian has been with the firm for 9 years.
  How can investors interested in your investment services learn more about your company?  
  Do-it-yourself investors are invited to visit our 3 websites,,, and Please note that offerings to invest in The James Advantage Funds at are made only by prospectus. Folks not on-line may have written information on all 3 product lines mailed to them by calling 1-888-426-7640. Investors are also encouraged to ask their financial intermediaries whether employing James Investment Research in one of these 3 ways makes sense.  
  I see you provide daily market comments. How can someone find out how to be put on a list to receive them?  
  The daily comments are available as streaming audio on our website At the same website, folks can sign up to receive our weekly market commentary via email. Both resources are provided free-of-charge.  
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