A West Coast Treat

"If you take care of the downside, the upside will take care of itself."

Who said that? Warren Buffett? Bill Miller? It certainly sounds like something from either of those two. But it was the guys from West Coast Asset Management (WCAM) in their May 2007 white paper titled "The Downside of Perfection."

Anyone preaching margin of safety and using Whole Foods (Nasdaq: WFMI) to testify why a great company "is not a good investment unless the price is right" is one we want to study.

West Coast is a registered investment advisor with a team of five on the investment committee who, according to the firm's literature, have a significant portion of their assets in the investments. Eating your own cooking is a good way to make sure interests are aligned. So let's see where the group has been dining lately, according to its most recent 13-F filing.

Number of shares in thousands:	31-Mar-07	30-June-07
QLT Inc. (Nasdaq: QLTI)	4,533	5,107
Johnson & Johnson (NYSE: JNJ)	315	320
4 Kids Entertainment (NYSE: KDE)	823	1,306
Automatic Data Processing (NYSE: ADP)	359	348
Microsoft (Nasdaq: MSFT)	765	14

Data from CapitalIQ.

The portfolio
The goal is the highest returns with the least amount of risk, where risk is defined as loss of the capital. Amen, brothers! The portfolio is concentrated, but the structure is very interesting. For a relatively small firm -- around $450 million in managed assets according to a presentation on its website -- it has an interesting mix of companies.

There are some opportunistic bets on big companies like Johnson & Johnson and Automatic Data Processing, which probably won't appreciate very quickly, but may provide consistent returns with less risk, depending on the price paid. These can offer a nice (dare I use the word stable in markets like today's) returns for the portfolio.

Then there are bigger bets on smaller companies which, if they have a good margin of safety, can provide downside protection and lots of upside. The company has outperformed the S&P 500 with 12.3% annualized returns since inception in January 2001, versus 2.4% for the index.

Additions
So what are some of these smaller companies? Ophthalmology and dermatology specialist QLT Inc. is one. Admittedly, biopharmaceuticals are not my specialty. So I will defer to my Foolish colleague Brian Lawler on its recent sales announcement. And while West Coast may have made a big bet on the company and bought on the dip during the reporting period, the stock has dipped further since. That drop seems to correlate with the sentiment from our Motley Fool CAPS community, which gives the company a one-star rating (out of a possible five).

4 Kids Entertainment is another one-star company in CAPS. It looks like WCAM is sticking to the notion of "being greedy when others are fearful." The company is broken into four segments: Licensing; Media and Broadcasting; Television and Film; and Trading Cards and Games. Brands include Teenage Mutant Ninja Turtles, Yu-Gi-Oh!, and Chaotic. Revenues have been declining for a while, which may be one reason for the low CAPS rating. As with QLT above, WCAM must see something different, a catalyst on the horizon perhaps, and has a price it feels compensates for the risks.

Subtractions
The company quotes uber-Foolish investing guru Philip Fisher when selling stocks. Some reasons to sell are: "When it becomes clear that the original rationale for purchasing was flawed; when a company no longer qualifies as a top performer; when there is a better place to put your money."

According to its 13-F, the company almost eliminated its position in software giant Microsoft. If I consider their selling criteria, I doubt there was a flaw in the original investment thesis. After all, Microsoft's story is pretty well-known. My vote would be on criteria number three: selling when there are better places for the money. Microsoft is not going to make anyone seriously rich. It's just too big. So I am guessing some of that capital was moved from Microsoft to the other opportunities above.

The Foolish sum
It's tough to separate yourself from the investing pack unless you're doing something different. And while its value-based philosophy is somewhat common, West Coast's choices certainly are not. That's why it's good to use 13-F filings to study what fund managers are doing. Remember, it's not about copying; it's about stealin'. After all, positions can change quickly. But we can become better investors by studying great investors' philosophies and then looking at their decisions.

Microsoft is an Inside Value newsletter recommendation. To see how lead analyst Philip Durell outperforms the market by also focusing on margin of safety, sign up today for your free 30-day trial.

Whole Foods is a Stock Advisor selection.

Retail editor and Inside Value team member David Meier does not own shares of any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.