To call General American Investors quaint is an understatement. Created in 1927, GAI was one of the original closed-end funds -- that is, a fund that trades on an exchange just like a stock. The firm that runs GAI does only that: It manages no other mutual funds (closed-end or traditional) or private accounts, and it does not offer investment advice. In its nearly 80 years of existence, GAI has had just five managers. The cozy midtown-Manhattan office of the current manager, Spencer Davidson, is the same size as those of GAI's analysts and other professionals. The typical GAI shareholder is something of a throwback, too. GAI investors tend to hold on to shares for generations, says Davidson.

But there's nothing quaint about the fund's record. Over the past ten years through 2005, a period that coincides almost precisely with Davidson's tenure, General American (symbol GAM) gained an annualized 15% on assets, six percentage points per year more than the return of Standard & Poor's 500-stock index. (Because a closed-end's shares move independently of the value of the fund's holdings, performance is measured both on the basis of assets and on the moves in the share price; return on assets is a better barometer of a manager's skills.)

Davidson, 63, and his colleagues enjoy their privacy and rarely grant media interviews. But General American, which holds $1.3 billion in assets, has traded at a double-digit discount to its net asset value per share for three years, and its mid-January price of $36 represents a 12% discount to the value of its holdings. Sometimes a little publicity does wonders to stoke interest in undiscovered gems such as GAI. And that can narrow the discount.

This unusual fund and Davidson's approach to stock picking were the subjects of our conversation on a winter day at General American's offices, around the corner from Grand Central Station.

KIPLINGER'S: You've compiled a terrific record at General American. What's your secret?

DAVIDSON: We look for exactly what everyone else does: growing companies with strong balance sheets, terrific management and stocks that we can buy and hold forever and never have to pay any taxes on. Our turnover averages 20% a year. What differentiates us is that we take full advantage of the fact that we're a closed-end fund. Our assets don't disappear, so we are not especially affected by market volatility. And our time horizon is much longer than that of most funds. So we can be opportunistic by buying when others are selling, without concern about near-term price action.

How would you characterize your style? We buy growing companies at reasonable prices. Compared with the S&P 500, our holdings tend to exhibit stronger growth and have stronger balance sheets, but the price-earnings ratios of the stocks tend to be lower. Everything here is analyst-driven -- our six individual analysts really run the portfolio -- and we tend to focus on four categories: retail, health care, finance and hard assets.

Speaking of hard assets, one-fourth of the fund is in energy stocks. How did that happen? We started boosting our position in the group roughly 18 months ago. We observed that energy stocks were only 6% of the S&P 500, but their contribution of earnings and cash flow to the S&P was a multiple of that. And we remain overweighted in energy. Currently, energy stocks account for roughly 9% of the index and contribute almost two times that percentage in earnings and cash flow. Our long-term view is that other investors will see things our way and that the stocks will once again reflect their proper weighting in the index.

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