On Daruma's Watch
monthly small-cap insights for investment professionalsJune 2010
Vol. 3 No. 6
When it comes to air travel, turbulence is to be expected. If you're not of the same mindset with your investments, you may be in for a bumpy, barfy ride.
Please reply to share your comments, questions or objections (we respond to all of them).
All the best,
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
Barfing Your Way to Investment Success
(Warning: do not read while eating lunch or if allergic to philosophical musings.)
The joys of Road Warriordom are many: cramped middle seats; endless flight delays; small, impossible-to-open bags of over-salted peanuts. Some days - thanks to delays, cancellations and ever-present bureaucratic stupidity - are worse than others.
And yet on a recent trip to Charlottesville, Virginia, things appeared to be humming along just fine. It was a beautiful spring day and we were right on schedule. Ours was a prop plane, but even that didn't dampen my mood - a longer flight, yes, but also a more leisurely approach into La Guardia and a chance to savor my favorite skyline.
There was, however, one little hitch: Prop planes mean turbulence. That doesn't bother me (I have a cast-iron stomach), but it clearly was a problem for the woman and toddler seated across the aisle.
I hadn't seen this much projectile vomiting since one of my sons outgrew the stage. He shall remain nameless (you have a 50/50 shot at guessing correctly, however), but let's just say that for the first two years of life he was known around the house as "Sir Barfalot."
But I didn't really mind; one good thing about being a parent is that it teaches you compassion. When something horrific happens to other people's children on a plane - whether that's temporary satanic possession or saturation vomiting - you're just so grateful that it's not your child and your public mortification that even if stray bits of chunder land on you, it's not a big deal.
That said, the scale of the resulting cleanup - only slightly smaller than BP's Macondolypse Now - made me wonder if mother and son would ever fly again.
Which was a stupid thought, I soon realized. I mean, what are the alternatives? By foot, by bicycle, by car, by bus, by train? All of these are impractical, take more time and, while generally less turbulent, come with their own share of risk.
It's kind of like investing: If you want to reach your final destination of a decent-sized nest egg, at a retirement age shy of three digits, you're going to risk throwing up along the way.
The problem is that market turbulence (a.k.a. losing pots of money) can be so traumatic that some investors develop a fear of flying. Individual stocks blow up, the market swings between extremes of fear and greed, and even that old standby, diversification (or diworsification as a witty friend puts it), doesn't help when all asset classes implode concurrently.
Add to this the human, asymmetrical bias towards feeling more pain when things are bad (read: losses) than pleasure when things are good (read: profits), as well as our tendency to remember the unusual (plane crashes) rather than the common (car crashes), and it's no wonder some people go running for the exits.
But the truth is, all approaches to making money come with cookie-tossing potential:
Everywhere you look, there's barf-inducing turbulence.
So here's where I come out. I learned early on from my grandfather of the awesome power of leverage to wreak havoc on the downside. To this day, I remain a chicken about debt, but my cast-iron stomach keeps me happily in the investment game.
Maybe I'm just a risk-taking entrepreneur at heart, but somehow I'm able to keep in mind that waking up every day has its perils and in the long run we are all dead. Investing (and life) means dealing with - no, expecting - turbulence along the way and savoring the occasional and unexpected smooth flight when it does come around.
Just be sure your tray table is up and that barf bag is in the seat pocket in front of you.
GOOOOOAAAAL!Yes, it's true. Another four years have whizzed by since Zinedine Zidane (Zizou to those who love him) broke my heart by head-butting Marco Materazzi in the World Cup final in 2006, getting him sent off the field.
And now, with the 2010 World Cup at hand, the Quants at J.P. Morgan are forecasting its outcome via a stress-tested model based on market prices, FIFA Ranking, historical results, and the (presumably proprietary) J.P. Morgan Team Strength Indicator.
Their prediction? The winner of the 2010 World Cup will be ... ENGLAND!!
Right. Clearly their model is a couple of factors shy of a load. I'm just saying.
Read more about Quants and Soccer here.
At the Crossroads of Art and Finance?Back in the day, we'd feel like us suits had suddenly become cool when we'd stumble across the graffiti of Revs and Costs. Behold the income statement as supersized work of art, created by real artists, not mere accountants!
Alas, it was not the case. Here, the relationship between artists Revs and Costs was not a financial one. In fact, Revs, according to that unimpeachable source, Wikipedia, told a Times reporter, "Once money changes hands for art, it becomes a fraudulent activity."
Thankfully, not everyone shares that opinion, or God knows what Sotheby's (a Daruma holding) would have to auction off to stay in business.
Revs and Costs did, however, inspire us to come up with another brilliant marketing idea: a Daruma tag, available for free (see below) so that those of anti-social bent can spread the word! Just do me a favor, and when you get caught by the cops with a can of spray paint in your hand, don't say nuthin'.
About UsFounded 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. 8.1% 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: http://www.darumanyc.com/disclosures.htm)
For more information about the work we do, please visit us at www.darumanyc.com.
© 2010 Daruma Asset Management, Inc.