June 2009
Vol. 2 No. 6
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

Specifics are at the heart  of both effective communication and informed decision making.  Today's newsletter explains, specifically, why that is the case.
Please reply to share your specific comments, specific questions or specific objections.

All the best,
signature - Mariko
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
articleOneColumbo's Guide to Smart Investing

Like millions of other Americans our family hit the road on Memorial Day weekend, headed for Gaithersburg, Maryland and the prestigious Potomac Memorial Soccer Tournament. With both of my kids involved, I had twice the usual number of games to watch - in 90% humidity and 90-degree weather - for a total of nine games over three days.

I loved every minute of it. As an intense and highly competitive person (what money manager isn't?), each match I watch may as well be a World Cup final. It's only because I've taken up sports photography that I've been able to keep my blood pressure and decibel level under control.

This time, however, there was an added benefit to watching so many games.

I got to observe a lot of different coaching styles, and in particular, that of my 15-year-old's coach, Shawn Hart. Unlike many coaches who seem to rely on a system of vague, primal screams shouted from the sidelines, Shawn gives very specific directives.

I overheard him telling players to "tuck in," "get behind the ball," or mark a particular man. I even heard him tell a momentarily ineffective forward to just "put the ball on the ground and kick it at the goal." His communication style - one based in specifics - is largely responsible for his success as a coach. (My son's team won the tournament that weekend, despite having played together for just one year.)

But it's not just soccer coaching where clear and specific language adds value; the more concrete, the better we human beings process and remember information. The best-selling marketing communications book, Made To Stick, makes this point in spades:

"Naturally sticky ideas are full of concrete images - ice-filled bathtubs, apples with razors - because our brains are wired to remember concrete data. In proverbs, abstract truths are often encoded in concrete language: 'A bird in the hand is worth two in the bush.' Speaking concretely is the only way to ensure that our idea will mean the same thing to everyone in an audience."

Language that is specific is also more credible.

Consider the Columbine tragedy, for example. Journalist Dave Cullen wrote a book on what really happened ten years ago (all the initial media reports were wrong, it turns out).

In it, he explains that according to an FBI report on school shooters and how to identify threats, "... the more direct and detailed a threat is, the more serious the risk of its being acted on." While this may seem obvious, if we're not aware of the tight connection between specificity and future action, we may pay more attention to a threat loaded with emotional language rather than clinical details.

In the world of investing, specificity also plays an important role, whether we're evaluating stocks, companies or the people who run them.

Our industry in particular seems drawn to jargon. We toss around terms like "return on invested capital," "incremental operating leverage" and "swing capacity," without always having a clear, detailed view of what's really going on inside a company. As a result, it's easy to have a long conversation that stays in the realm of the abstract.

But the valuable information is in the concrete. That's why in practice, when looking into a company, we don our Lieutenant Columbo persona (did the TV character even have a first name?) and ask specific, some might say "dumb-ass," questions. It's these types of questions that allow us to understand the realities that drive the construct we call "the financials."

For example, when management explains that it is taking steps to "align compensation with shareholder goals," we want to know exactly how that will be implemented. If our questioning reveals that the sales force will no longer have the freedom to set the price wherever it's easiest to get the deal done, or that commissions paid will now be based on how profitable the business booked is, we can figure the odds that earnings will be better going forward.

Incidentally, in terms of evaluating your money manager and how he or she is investing your assets, the same rules apply. If you don't ask concrete questions - questions that yield specific, detailed, understandable answers regarding practice, behavior and process - you're flying blind.

Questions like what were the last three stocks you sold, why did you sell them, what was your return, and how long did you hold them, are guaranteed to give you a truer picture of your manager's sell discipline than the marketing brochure will. Value is created on the ground and specifics are what help ferret this out. (If you're nice to me, I'll write a newsletter someday on what ten questions you should ask of your manager when looking at your portfolio.)

In the end, it's not that we business and finance types are always trying to hide something. It's just that we have a weakness for abstract and technical jargon, and we get used to speaking in business and marketing tongues. Just remember that true insight will always be found in the details and in plain English. It's the only way to know if the ball is actually headed towards the goal.

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articleTwoFrom the Ministry of Silly Speak

Why spend millions on consultants to develop an inane corporate mission statement? You can do it for free at the mission statement generator. This is what happens (shudder) when you cross a slot machine with business jargon.

Laugh yourself silly by clicking here. I dare you.
articleThreeWon't Quit My Day Job

Trust me, taking pictures from the sidelines makes attending soccer tournaments a lot more fun and a lot less stressful. Don't get the wrong idea. I'm not quitting my day job any time soon. How could anyone give up a job that requires you to be a cross between Nancy Drew and the Spanish Inquisition? It's way too much fun!

But you've all been telling me how much you enjoy the photographs, and newsletter taskmaster and chief penguin Michael Katz insists that I give you what you clamor for, month in and month out.

Click here to view the tournament album (complete with a look at the 1st place medal!).
articleFourDaruma Pompano Index
The latest on the DPI:
Pompano pond population is now 3,695 fish, down by 10. Of these, 9 were acquired, and 1 got relegated to the pink sheets. 62% were up, as befits a market (Russell 2000) that was up 3% for the month, though the rally is losing steam. Back in April, the Russell was up 15% and 79% of stocks in the pond were up.

The fish are getting more expensive as the market creeps higher. The number of stocks trading below $1 (424) and below $5 (1506) at month-end declined from April's levels (498 and 1586, respectively). Stocks trading below net cash and net-net working capital also decreased, from 84 to 69 and 18 to 16.

Health status: In the pink


© 2009 Daruma Asset Management, Inc.

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