April 2009
Vol. 2 No. 4
in this issue

logo - Daruma

Daruma Asset Management, Inc.
80 West 40th Street, 9th Floor
New York, NY 10018

About Us
Founded in 1995, Daruma Asset Management invests in a high-conviction portfolio of no more than 35 small-cap stocks.
Our firm is 100% employee-owned, and manages roughly $1 billion for public and corporate pension plans, endowments, foundations and individuals. Our small-cap composite has an annualized return net of fees of 9.1% vs. 3.9% for the Russell 2000 since inception (7/28/95 through 03/31/09). (Notes to Performance

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

The economic news these days is all about what's wrong. And whether you believe the dire predictions or not (I don't), too much attention on them will distract you from the task at hand.
Please reply to share your comments, questions or objections.

All the best,
signature - Mariko
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
articleOneThe Cure For End-Of-The-World-itis

I grew up in Wahiawa, Hawaii, a place that on most days felt comfortably safe from imminent destruction. And yet I couldn't help wondering about those yellow fallout-shelter placards posted on buildings all over town. What did they mean, and who were they for?

I simply had to know. And so as head of our school's sixth-grade lecture program, I took it upon myself to invite an official from civil defense, in the hope that he would come and clear up the mystery.

Oops, big mistake. Our guest arrived a few weeks later - uniformed, crew-cutted and enthusiastic - and proceeded to spend an entire class period talking about nuclear attacks and tsunamis, complete with disaster photos and scary stories. Not exactly what your average 11-year-old needs to hear.

So when the local disaster test siren wailed at high noon the next week, I freaked out, found a phone, and called my father. It was the same warning siren I'd heard every month for years, but now, thanks to the recent visit by Dr. Doom, I could now picture the end of the world, in Technicolor, no less.

Clearly there's a downside to being a very curious person, and it's no wonder that for our next speaker, I booked the local tofu maker.

A fascination with bad news

There's just something so, so ... compelling, about Armageddon, whether natural or man-made, physical or financial. It's so alluring, in fact, that we've become a nation of porn addicts - pessimism porn, that is.

Remember Kitty Genovese? Her horrific murder in 1964 is permanently stamped on our national memory and is the Psych 101 textbook example of "the bystander effect." Despite the fact that her tragic death was not accompanied by the gross and wide-scale indifference initially reported in the press, the myth is alive and well.

Or how about Orson Wells' 1938 radio adaptation of the War of the Worlds, an event that (supposedly) sparked a massive panic because people thought Martians were invading Grover's Mill in New Jersey? Turns out most people either caught on fast to the joke or weren't even tuned to that particular broadcast. And yet, "the panic" is part of our national lore. (According to historian Elizabeth McLeod, "The exaggeration of the War of the Worlds story can be interpreted as the print media's revenge for being badly scooped during the previous month" [on coverage of the Munich crisis].)

It's not time to hoard your gold

In 2009, this toxic media laser of impending doom is pointed squarely at the financial markets. We simply can't get enough "titillating" bleak news reports, breathlessly served up by the media. The very same media that have an agenda beyond solely reporting all the news that's fit to print. (You don't sell dead trees with headlines that read, "All is well, citizens; return to your homes.")

Maybe it's because people on Wall Street are used to being envied rather than demonized, but the number of otherwise sane people in the business telling me about the size of their personal gold stashes because "this isn't just a financial crisis but a financial Armageddon, you know" has become ridiculous. (When they start telling me they're building gun stashes then I'll really start to worry. Think of all the destruction we finance types wrought onto the world just by using Excel. Imagine if we had ... gasp ... weaponry?)

I think it's gone much too far. There's a difference between our current circumstances and those that require action of the bomb-shelter-building, gold-stashing, diamond-sewing-into-hems sort.

... For my husband's grandparents, it was when guys in brown shirts were looting their house in Dusseldorf on Kristallnacht. His grandfather was a decorated WWI vet (the Iron Cross) and thought the craze for brown clothing and goose-stepping would wane.

... For the father of my 15-year-old son's soccer teammate it was when a coup d'état in Gambia meant that he, as a provincial governor, got thrown in jail after the requisite beating by thugs.

But for most of us, most of the time, we're not even close.

And so, if you or a colleague is suffering from a bad case of end-of-the-world-itis, print out my six-step recovery plan below and tape it to the wall of your fallout shelter:

  1. Go on a one-week media diet. OK, maybe not during market hours. The point is, paying attention is not the same as being emotionally contaminated. Unnecessary and compulsive consumption of a high-fear media diet isn't going to change reality, but it will affect your mood. If you weren't so bummed out, you might even notice that there aren't any thugs knocking on your door, recession or no.
  2. Hang out with happy people. Turns out that happiness is extremely contagious, and if you hang out with happy people, you get happier as a result (the opposite is also true; see #1 above). Or become a vector for happiness yourself and spread good cheer among others.
  3. Watch Marx Brothers movies. Read funny books. Go to comedy clubs. Do laughter yoga. Norman Cousins wrote extensively about the healing powers of laughter, a fact that has been well-documented in study after study. It'll even lower your blood pressure, for starters.
  4. Write down three things that you're grateful for, every day, for one month. It will help to "accentuate the positive, eliminate the negative, latch on to the affirmative and get rid of Mr. In-between," as that old Johnny Mercer ditty goes. Heck, why not listen to it after waking up and before going to bed every day?
  5. Donate time or money to others. It'll take your mind off your gold hoard and improve the state of the universe. Not to mention connecting you with the well-documented health and emotional benefits of altruism.
  6. Smile more, even if you don't feel like it. Somehow the physical act of smiling triggers happy brain chemicals. Which makes you feel happier. Which causes you to smile more. Which triggers more chemicals. Pretty soon people will want to hang with you (even though you're in finance), and that warm glow will once again return to your heart.
My promise to you. Dr. Doom didn't guarantee survival back in 1973, but I can guarantee you'll survive this financial mess better if you follow my advice, if only because happiness and fear-induced paralysis are mutually exclusive.

And, if it turns out that we do need to start growing our own food, I'll even teach you how to make tofu out of soybeans. Being curious has its upside, too.  

Click here to print this newsletter

Click here to forward this newsletter


articleTwoInvasion of the Stupid Marketing Tactics

An ad for Daruma was found on Jason Sadler's torso on March 8th. The human billboard (AKA "I Wear Your Shirt") beefs up his wardrobe and his bank account by wearing your ad on his chest for a fee. He'll video, photograph and blog about himself as proof.

OK, so it's not Times Square, but it seemed like a good idea at the time.
articleFourDaruma Pompano Index

The latest on the DPI:
March booked over three times the number of up stocks (2,561) versus February (770). By decile, the smallest continued to outperform the largest by a big margin (up a median of 28.5% versus 13.2%). However, March's rally meant that on an absolute basis, across market cap sizes, the stocks that were up were up big.

Not surprisingly, given the rally, the number of stocks below $1 went down, to 594 versus 639, as did the number of stocks below $5 (1,782 versus 1,876). However those trading below net cash hardly budged at 109 (versus 110 last month), as did those trading below net-net working capital (24 versus 26).

We've also tweaked our free cash flow (FCF) yield net to catch more useful fish. We noticed that often those with a very high free cash flow had miniscule market caps, which resulted in gargantuan free cash flow yields. We knew that the whale in the aquarium was probably debt, so we recalculated free cash flow yield to be measured against enterprise value. We closed out March with a more realistic 632 stocks trading at a FCF yield of 10% or more, down from last month's 679.

Our fish population has declined to 3,709, with 11 more fish gone. 2 died, 5 got bought (1 by a private equity firm, the rest were strategic acquirers), and 4 moved to the pink sheets.

Health status: perking up.


© 2009 Daruma Asset Management, Inc.

Newsletter developed by Blue Penguin Development