Michael: Can you explain how the "lack of liquidity" in the market affects my Small- to Mid-Cap Value portfolio?

ICM: Periods of poor liquidity, such as the current environment, can be detrimental to small- or mid-cap value investing, since our emphasis is on smaller capitalized companies. Fortunately, these are generally brief periods typically not exceeding one or two quarters. One factor that helps minimize this problem is investing in companies that are more liquid. While ICM is sensitive to trading volumes and liquidity constraints in an attempt to overcome liquidity difficulties, these illiquid periods may give ICM an opportunity to purchase stock in companies that we believe are at the bottom or close to the bottom of their life cycle.

Jack: My Small- to Mid-Cap Value account had been doing so well up until lately. What can I expect to see happen in the next 12 months, and more importantly, over the next three to five years?

ICM: The small- to mid- cap value asset class was the top-performing asset class in the year 2000, 2001, and 2004, as measured by the Russell 2500 Value Index. Although it is difficult to predict the future, we believe the near-term will continue to be volatile. We are concentrating on individual companies in addition to ideas that span across all sectors. We also expect to see improving visibility for our existing positions. As far as the long-term is concerned, we believe the stage is being set for the next bull market. The undervalued company stocks we are purchasing will, we believe, contribute to positive performance in the future. After all, value investing is about buying stocks at the bottom of their market cycle with the belief that the market will recognize the stocks true valuation which will result in an increase in its stock price.

Shelly: Does ICM use a top-down approach to investing or a bottom-up approach?

ICM: ICM uses both. In the top-down approach, broad sectors of the equity market believed to offer good relative value are identified. Individual companies within those sectors are then isolated that meet ICM's investment criteria. In the bottom-up approach, ICM attempts to discover inefficiently priced stocks regardless of how their respective sectors are valued. Both approaches involve fundamental analysis. Price targets are established and buy and sell decisions are a natural outcome of the price targeting process.

Jim: I hear a lot about value stocks and growth stocks and I have a good idea about the difference between the two investment styles. But how does ICM classify a stock as a value stock and what do you look for when you decide to buy a stock for your portfolios?

ICM: ICM's value-investment approach looks for small, under-researched companies not followed by many analysts and that have fallen into disfavor with investors. We look at the management team. Do we believe the company has a strong management team with knowledge and expertise in the type of business they are running? If we do, this certainly is a positive aspect towards making the decision to buy the stock. Is the company showing signs of improved business fundamentals? Are fundamental valuations low enough to meet our criteria, such as a low price-to-book ratio and a low price-to-sales ratio along with good cash flow? There are other things we look for that we believe would add value to the company. This would include, but is certainly not limited to, the company finding new sources of earnings, expanding into new geographic areas, and discovering new technological breakthroughs.

Jane: What are some of the ways your firm manages risk in my portfolio?

ICM: Keep in mind that we are value investors. We invest in companies not followed by most research firms and that have fallen out of favor with the market - unloved companies as we say. Because of this, we rarely pay a premium for stocks and believe downside risk is minimized. Another way we manage risk is through fundamental research. While nobody is right all the time, if we do our homework on companies, risk is again minimized. We also manage risk by scaling into positions. This means we begin with a small position in a company and as our comfort and confidence grows with that company, we increase our holdings. Another way we control risk is through diversification. We are diversified among sectors, not being too heavily weighted in any one sector. We do not want a single sector to carry the portfolio. We also diversify among companies, carrying approximately 30-50 different stocks in the portfolio. Stock weightings in the portfolio are generally anywhere from 1%-3% of the total. As stock prices appreciate, we usually begin to trim these positions, keeping the weights below 5%. Occasionally, for various reasons, we might exceed the 5% threshold if we believe there is still value at that stock price.

Robert: The stock market isn't doing much of anything these days. It has just been fluctuating within a narrow trading range over the last few months. What will it take to get this thing going?

ICM: We believe the ball is in the American consumer's court. If consumer confidence increases, spending will also increase. This will give the economy a much-needed boost, not only in the U.S., but also around the world. However, the employment outlook continues to deteriorate and FHA mortgage delinquencies are on the rise. Because of these factors, we remain pessimistic about a significant increase in consumer spending. Over the next few months, we expect this stock market fluctuation to continue.

Gary: The market sure has had its ups and downs lately but seems to be stabilizing a bit. With the way the market has changed over the past year, have you made any significant changes in the way you manage money that would impact my account?

ICM: ICM's small and small- to mid-cap value investment style has not made any changes that would impact this account. Despite the market's volatility, our small-cap value equity approach continues to search for under-followed companies that we believe to offer good relative value. These companies usually have either fallen into disfavor among investors or are relatively small and under-researched. Ideally, ICM is looking for a combination of fundamental under-valuations with significant evidence of strong management and improving business fundamentals.

*May reflect actual questions or a composite of various questions and questions designed by ICM to address an item or issue that ICM believes to be of interest.