On Daruma's Watch

monthly small-cap insights for investment professionals

October 2013
Vol. 6 No. 9


Edith Piaf's best known song, "Je Ne Regrette Rien" (I regret nothing), became the rallying cry for the French Foreign Legion. I think I know how she felt.

In today's bull market, regret - mostly over stocks passed over - can take on a life of its own, if we're not careful.

With that in mind, this month's newsletter examines this human emotion and offers suggestions for managing it in our business in particular.

(To listen to this month's newsletter, click here.)

All the best,

Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Capital Management LLC

Bullmarket Regrets and Edith Piaf Songs

I've had regret on my mind of late, for which I blame the bull market and long dead, but still famous French singer, Edith Piaf.

Piaf, known as "The Little Sparrow," was a tiny woman with a complicated past, some of which was spent as a "working girl" on the streets of Paris. She had a big, unforgettable voice - the perfect soundtrack for heartbreak and loneliness.

So when I saw that a tribute to her was going to be held at the Beacon theater, I snatched up tickets, figuring it was a perfect excuse for a girls night out.

But it was weird. Mostly because while the event was happening before our eyes, it was also being taped for French television. Let me tell you, what makes for good TV is best enjoyed on the couch at home, rather than in person. From prison-caliber searchlights to cameras swooping around on hydraulic booms, watching a live event designed for a taped audience results in a bunch of stuff that gets in the way ... enough to make me almost regret attending!

And yet, it was great listening to songs that Piaf made famous, including one of her best known, "Je Ne Regrette Rien" (I regret nothing), a song which became the rallying cry for the French Foreign Legion (that is so badass!). I'm even thinking about making it Daruma's official song. With lyrics like, "It's paid for, swept away, forgotten, I don't care about the past," how could I not? 

Because if you've been reading for a while, you know how I love to carp on about the importance of us stock pickers letting go of the past and focusing on the future, as a means of getting out of our own way. Studying the past is necessary, but hanging on to it is fatal; you can be 100% correct in your analysis and the stock could still be a dog. If you can't shake off defeat, your confidence and judgment will suffer.

And while investing may not require French Foreign Legion levels of combat readiness, it does require the same mental toughness. The more I do this the more I think a degree in psychology may trump a degree in finance.

But back to the topic at hand: My ruminations on regret are of the bull market variety. Whereas bear markets make me regret owning every single stock in the portfolio, bull markets make me regret every stock we flirted with but didn't buy.

Why? Because it feels like everything we looked at and passed on is up way more than what we own or bought instead. And whether we passed for stupid, the-dog-ate-my-homework reasons or because we thought the price wasn't right, this is what happens in bull markets:

...the stock gets bought out at a ridiculous premium, or

...activist shareholders announce their position the day AFTER we shut the file for good, or

...the stock simply skyrockets, just out of spite.

As the markets rise, great ideas are harder and harder to find. Everything cheap has so much "hair" on it that it makes Chewbacca look as sparse as Kojak (look him up, youngster). Sorting through the "hair" that makes the stock cheap - and therefore unattractive to other investors - is not only time-consuming, it requires the investment equivalent of a hazmat suit.

On the other hand, if a new idea has a timely and compelling investment case, it will be anything but cheap. Even if other investors haven't discovered ALL of its charms, it will be 30% higher just because of the rising tide of the market. We then hesitate to pay up - because we all know what happens when the tide goes out.

Most days, therefore, you're faced with either loading down the portfolio with broken down junk that, while cheap, doesn't represent real value and will sink further or, chasing stocks that have gone parabolic, leading to multiple compression when the inevitable market melt-down happens.

In short, bull markets make you want to grab the nearest bottle of whiskey and listen to Edith Piaf songs until the market rolls over and dies.

Here is how I keep the hounds of bull-market frustration at bay:
  • I work on what look to be great businesses, regardless of valuation, figuring that one day we may get our chance.
  • I look to see which insiders are buying their stocks, because most of them are now selling faster than you can say hot potato.
  • I look to see where there's a management change, because maybe the force will be strong with them, and a piece-of-junk of a business will start to deliver and the stock will levitate.
And, most important of all, every day, without fail, as sacred to me as a bedtime prayer, I think of the following advice: One morning, years ago, I scrambled down the subway steps, only to find the train leaving the station, a pissed off woman cursing up a storm and a homeless guy sitting on a bench. After watching the temper tantrum unfold for a minute, the guy finally said: "Lady, relax. Trains are like men. Another one will come along."

So whenever I think of Piaf songs and of the frustration of the hot stock that got away in this bull market, I remember that patience is needed to get over those heartbreaks. Because another new idea, like trains and men, will come along soon.

edit piaf

Edith Piaf Singing "Je Ne Regrette Rien"

Take three minutes now to click this link and listen to Edith Piaf sing this wonderful song.

(Whiskey bottle optional.)

About Us

Founded in 1995, Daruma Capital Management invests in high-conviction portfolios of no more than 35 stocks.

Daruma manages $2.1 billion for public and corporate pension plans, endowments, foundations, and individuals. Our annualized Small-Cap return net of fees since inception is 12.8% vs. 8.3% for the Russell 2000 (7/28/95 to 6/30/13). Our annualized SMid-Cap performance net of fees since inception is 8.1% vs. 12.9% for the Russell 2500 (4/30/10 to 6/30/13). Notes to Performance

For more information about the work we do, please visit us here.

© 2013 Daruma Capital Management LLC