May 2010
Vol. 3 No. 5
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.
Daruma manages roughly $1 billion for public and corporate pension plans, endowments, foundations and individuals. For Q1 2010 our small-cap
composite was up 11.1% vs. 8.9% for the Russell 2000, net of fees. Our annualized return since inception is 12.8% vs. 7.2%, net of fees (7/28/95 through 03/31/10). (Notes to Performance)
For more information about the work we do, please visit us here.


There's nothing wrong with making a buck. But too much emphasis on today's bottom line almost always endangers your long-term profitability.
Please reply to share your comments, questions or objections (we respond to all of them).

All the best,

signature - Mariko
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
articleOneSlime, Crime, Nickel and Dime

After 40 years without laying eyes on each other, my BFF when I was eight and I recently had a reunion. Pascale had been living in her native Provence all these years and when the scheduling stars finally aligned, she came to visit me in New York City.

Remarkably, in the essentials we were unchanged - just older versions of our eight-year-old selves - tomboyish, independent and driven. So we had a lovely time those seven days, catching up on four decades' worth of life as we hit most of the tourist spots, including, naturally, the Empire State Building.

Here's where the criminal alert occurs: The way to the ESB observation deck is lousy with pickpockets.

Not the sticky-fingered Dickensian kind - the less skillful, but equally nefarious, feral capitalism kind. There was the virtual reality "sky ride" pre-security screening; the mandatory (yes, mandatory) photo taken while waiting in line; the New York City maps for sale; the coin-operated telescopes; the audio tour; and finally, the gift shop, through which you must exit to regain your freedom.

All in all, there was not a single squandered opportunity to get you to part with a buck. In fact, the only two places where you weren't pressured to open your wallet were at the surly security screening point and in the restrooms (I'm assuming the latter violates some law?).

In terms of dollar-extraction efficiency, there was much to be admired. In addition to the finely-tuned process described above, each of us - along with 3,499,998 million of our fellow visitors each year - forked over $20 in admission ($40 if you were in a hurry and wanted to jump to the front of the line).

There was, however, one HUGE flaw in the whole operation: The interests of the tourists and of building management were just about diametrically opposed. Instead of feeling energized by the glorious view that King Kong made famous, BFF and I left feeling slimed by the incontinent merchandising of ESB management.

But aren't they maximizing revenue? After all, some out-of-towners will never be back in the Big Apple anyway. But many others - either residents or frequent visitors - will use this experience to spread the word, good or bad. Why try to pick my wallet so clean and risk pissing me off when an inexpensive gesture or two of goodwill could generate a warm glow?

If mutual interests are misaligned, the long-term results are typically lousy.

Sound familiar? When it comes to aligning the interests of customer and company, our industry often fares no better. Because while we are constantly cross-examined about the robustness, scalability, replicatability - and every other word that ends in "-ability" - of our investment method, when we focus so hard on process, we risk missing the bigger picture:
  • As money managers, we can fool ourselves into thinking that a flawless process is enough to keep clients happy, without asking often enough whether the raison d'être of our business supports or undermines our process.
  • As clients, we can focus so much on a blow-up-proof process that we neglect to examine what motivates the firm, both short-term and long-term. And an investment process that's not aligned with your interests will always violate the "life is too short" rule.
So ask yourself: Do clients exist to serve the firm, or does the firm exist to serve clients? Is it a mutually symbiotic relationship, or does one party have the upper hand? Are small clients bullied by large firms? Do large clients demand special treatment from their small investment firms just because they can?

Whatever the specifics of the relationship, if there's a power inequality that is willfully exploited, there is unlikely to be a healthy, long-term business partnership beneath.

Here at Daruma, not every decision we've made would pass a B-school case study. We haven't always extracted the last nickel. We've given assets back. We've shut down products when we've felt they would become a distraction. We've turned down offers to be bought by larger firms. We invest in marketing schemes like a Gambian soccer team, because it makes us happy to help others (not to mention it leads to some great photos - see "Daruma Backs Another Winner!" below).

But it's not entirely altruistic either; if we're happy because our investment process and our business goals are aligned, we'll do our best work on behalf of our clients. And in our experience, clients who experience your best, without having to shower off after every meeting, will consistently - and eagerly - come back for more.
articleTwoSlot Machine or DJIA?

Yesterday's wacko market found us huddled around our trader, Steve Cohen, looking to buy and muttering, "This doesn't look like 1987."

Later we heard rumors that an error entering a program trade triggered the break.
For a first-hand look at the momentary madness, click here to watch the numbers spin, courtesy of Steve and his ever-ready cell phone cam!

articleThreeDaruma Backs Another Winner!

Brikama United F.C. was formed in early 2002. Since then, this community-owned soccer team has quickly soared from 3rd to 2nd to 1st division of the Gambia National League.

We can't resist winners (whether stocks or people!), and after these young men were brought to our attention through a mutual friend, we decided to step up and support them with a gift of new uniforms.
Join us as we proudly cheer on our Daruma-logo-wearing friends from West Africa!
articleFourDaruma Mailbag

Our last newsletter ("When There's No There There") highlighted the importance of noticing what's NOT there in evaluating an investment opportunity.

Newsletter reader, technologist and good buddy Ken Weiss, offered his own additional metric:

I have another one for you, for use with technology-driven companies... Show me your system availability stats for the past week, month, and year, for all your critical systems.

It always amazed me how many managers were unable to immediately tell you what their uptime was and how it was trending. And I can tell you from personal experience, customers will accept mediocre systems that are available to really whiz-bang great ones that are down. Just like safety and productivity stats in manufacturing, availability should be ingrained into every level of a technology-driven firm.

Thanks for writing Ken, we couldn't agree more!

© 2010 Daruma Asset Management, Inc.

Newsletter developed by Blue Penguin Development