|Daruma Asset Management, Inc.
80 West 40th Street, 9th Floor
New York, NY 10018www.darumanyc.com
Founded in 1995, Daruma Asset Management invests in high-conviction portfolios of no more than 35 stocks.
Daruma manages $2.0 billion for public and corporate pension plans, endowments, foundations and individuals. Our annualized Small-Cap return net of fees since inception is 13.6% vs. 8.0% for the Russell 2000 (7/28/95 to 6/30/11). Our annualized SMid-Cap performance net of fees since inception is 18.2% vs. 16.7% for the Russell 2500 (4/30/10 to 6/30/11).
Notes to Performance
As with boxing, the path to investment success is to float like a butterfly and sting like a bee.
Today’s newsletter talks about the eerie parallels between boxing matches and investing in stocks.
to this month's newsletter, click here
All the best,
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
Enduring Market Ups and Downs
In investing, as in boxing, there's no shortage of theories on how to avoid going down for the count. In practice, however, surviving a pummeling boils down to just two things:
- Knowing when to do nothing
- Knowing when to take action
Unfortunately, when you're taking a bunch of body blows, you can't always be counted on to make the right choice.
As faithful readers know, I like to apply what I learn from my boxing lessons to investing. This summer provided many teachable moments, in both quarters.
For one, I did something I never thought in a million years I'd ever do - go to the boxing equivalent of a supper club. (Why listen to torch songs while you eat when you can see blood fly instead?)
My boxing instructor, The Hawaiian Mongoose was defending her New York State title at the thoroughly misnamed Cordon Bleu Banquet Hall in Woodhaven, Queens. I was curious, never having seen a boxing match, let alone a full line-up of them lasting from cocktails through dessert.
And what a scene it was! Characters everywhere, decked out in full costume: Lots of supersized people, all wearing bling, only a handful of whom were security (clearly, not all the action was expected to take place in the ring); an overdressed announcer in a zoot suit with a pocket square; underdressed babes in high heels and navel rings holding up cards announcing each round; even a ringside doc wearing surgical gloves and a stethoscope (how does one get that gig?).
As I watched bout after bout (three-minute rounds for men; two for women), it was hard to decide which was worse: watching someone "Turtle" (chin down and fists up taking punch after punch), or watching someone come out swinging, only to leave themselves open to a crunching, well-placed blow.
Either way looked like it hurt. A lot.
What I didn't realize at the time was that appearing to do nothing can be a strategy. If you can take punches in a well-defended position while your opponent wears herself out and makes mistakes, you can pick the perfect moment to land one on the kisser. Endurance ensures victory.
The same can be true for investing.
When everything you own is behaving like garbage, the frustration mounts to the point that coming out swinging wildly (i.e. ditching and replacing everything in the portfolio) seems like a cunning plan. Sometimes, though, taking the hits and doing nothing is what's called for. And while it can be easy to make a clear decision when it's not your head on the line, when you're in the ring with Mr. Market, it becomes a lot harder to think straight.
In 1999 for example, our small-cap lagged by over 1700 basis points. In 2000 we beat by over 2200 basis points. Did the portfolio change? Not to speak of. What changed was market sentiment; doing nothing was the right call.
Other times, however, you think you're standing by your convictions in the face of a psycho market when in fact you're just being stubborn. As Robert Sutton puts it, what one wants to have are "strong opinions, weakly held." A willingness, in other words, to change your mind when presented with contrary evidence.
Case in point: This August we went through a fifteen-day streak of relative underperformance in our SMid. Now, mind you, lagging the index is an occupational hazard, but one's performance usually bobs and weaves on the way to the doghouse. Such a relentless daily hazing is unusual. We have had lots of sixes and sevens, a few tens and twelves, but fifteen days is our record. (The odds of that are 32,768 to 1, by the way. Not that we're data geeks or anything.)
What did we do? This time, we decided to take a few swings at Mr. Market, and repositioned part of the portfolio. Why? The world had changed. And thus so had the risk/reward ratio of our holdings. We shortened the risk/economic sensitivity leash and reduced the number of stocks whose performance would be overwhelmingly driven by macro factors. (Mostly financials - no sector is more likely to catch the flu when the world's economy sneezes. In a systemic seize-up, the downside in the sector gets almost impossible to predict.)
Many lessons learned, but perhaps most important is this: In investing as in boxing, you can't win if you're not still standing at the end of the match; endurance is what matters most in any long-haul battle.
But it isn't about brute force - nobody has the luxury of infinite energy. The true champion knows when to block, when to punch and how to deftly deploy her resources.
On Darumas, Dreams and Determination
No, these Darumas do not dream of making it in the NBA (though if they put their minds to it, we bet they could).
The Los Angeles Lakers-themed Darumas pictured here were crafted by Misuzu-Ya, a Japanese shop with a much loftier mission: rebuild its city, Iwaki, after an earthquake and tsunami wrecked its homes and businesses. The shop-owner's brother lives in LA, and these Darumas were made with the local fan-base in mind.
The little shop's stance throughout the disaster has been single-minded: never give up. Even their Darumas stand by this motto. They sport the word "victory" rather than the customary "good fortune," and their eyes are filled.
Why color both eyes before the goal is accomplished? Owners of Iwaki Darumas are thought to be so fiercely determined that success is all but inevitable. Defeat is not an option.
Have you spotted a Daruma? Snap a photo, send it in and we'll share it with everyone.
Life's lessons are everywhere if you look for them: in the boxing ring, in bathrooms and yes, even in comic books. This year, I'm honored to sponsor an exhibit of one of my dearest teachers, Miyamoto Usagi, 17th century rabbit samurai and hero of Stan Sakai's epic comic book series (pictured at right, along with yours truly).
Usagi wanders feudal Japan on a relentless quest to vanquish evil spirits and protect the innocent. He suffers heartache and occasional defeat, but this is one tough bunny. His faithful readers know that no matter how masterfully malevolent his foe, Usagi will keep on fighting and keep on winning.