|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 $1.6 billion for public and corporate pension plans, endowments, foundations and individuals. Our annualized Small-Cap return net of fees since inception is 11.6% vs. 7.1% for the Russell 2000 (7/28/95 to 12/31/11). Our annualized SMid-Cap performance net of fees since inception is -1.7% vs. 4.7% for the Russell 2500 (4/30/10 to 12/31/11). Notes to Performance
For more information about the work we do, please visit us here
Business and investing share many things in common. And as my recent talk to a group of MBA students reminded me, one of them is this: There's a downside to experience.
This month's newsletter explains when and why.
(To listen to this month's newsletter, click here
All the best,
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
Learn Long And Prosper
At long last, and on the brink of turning 50, I finally made it into business school. And not just any old B-school - Wharton, no less.
Full disclosure... they only let me in for a couple of hours in order to give a talk - "What Got You From There To Here Won't Get You From Here To There: How To Get Out Of Your Own Way In Business."
Not only was the audience of executive MBA students sharp, they were also indulgent. They put up with gross gender generalizations, war stories and the occasional Star Trek reference, as I spoke about what it is that makes for a healthy relationship between your business and your self.
I had a blast. But it was more than just a fun couple of hours.
Both preparing for the talk and facing a milestone birthday led me to ruminate even more than usual on what makes for success in life, in business and in investing.
The key premise of my talk was that in the same way that we can never escape from our shadow, we can also never escape from our "stuff." Psychologically, we are the walking embodiment of an episode of Hoarders, loaded down with neurotic detritus.
And that's a problem - professional and business growth require personal growth. Unchanged, the same behavioral and psychological patterns that may once have served us well, now get in our way.
And what holds true for business also holds true for investing. The forces of entropy and complacency are powerful in the universe, and no matter how promising the start, as an investor you will be destined to mediocrity if you do not continue to grow.
Here's what I mean.
When you first start in this business you don't know the difference between a five-cent and a fifty-cent piece of information. You may be able to take apart financials and do a DCF calculation, but while you see the pieces, you don't see the whole pattern that tells you what expectations are embedded in a stock price.
This holds true for many professions, of course, from firefighter to ICU nurse. The novice can tick items off a checklist but still not see the constellation of danger they form. The expert instantly reads the whole pattern and sounds the alarm.
In this business, if you're any good, you start by becoming a student of market history:
- You must know how stocks hopped the tracks and how mindsets changed completely in the past. This helps you to understand what might work in the future.
- You then become a voracious acquirer of knowledge - of companies, methodologies, economic data, research tools, and so on. You become a question machine.
As time goes on and the wrinkles proliferate, you become excellent at pattern recognition, seeing not only those constellations of factors that lead to good results, but also (sometimes more importantly) seeing what's missing from the picture. You get good at both spotting Where's Waldo? and, at a glance, knowing that he's not there at all, thus avoiding squandering six months looking for him.
- Over time, you build a scorecard of wins and losses, which you must analyze to death in order to properly improve both the process and the outcome of your investment strategy. (If your ego can't handle minutely examining every mistake you make, you're in the wrong business. Being a good investor is not all unicorns and roses.)
BUT, and this is a big but (hence the all-caps), THERE'S A DOWNSIDE TO EXPERIENCE.
If you're not careful, you become a know-it-all. (Not that I'm suggesting there's an epidemic of smartest-guy-in-the-room syndrome in our business. I'm just saying.) You get so good at spotting patterns that you stop acquiring new knowledge at the rate you once did.
It's easier to send the young Turks to hit the road and go to conferences or visit companies - let them enjoy the delights of the middle seat on a coast-to-coast flight. It's easy to stop tracking how the world is changing through technology, media or globalization and thus how business and valuation models are changing.
When you do go to a conference, you want to visit with old friends - companies that once made you a lot of money. You won't be tempted to listen to the two guys in a garage whose technology or business model will obsolete your old friends into bankruptcy.
In short, new patterns are being created which you will no longer be able to recognize, let alone understand. Pretty soon you'll turn into your mother, who thinks the Internet lives in her computer and Twitter is what birds do.
You don't want to become that guy, do you?
Bottom line, if business and professional evolution demands concurrent personal growth, finely honed investment acumen requires intellectual growth as well. I repeat, the forces of entropy and complacency are powerful in the universe, and constant vigilance is required to keep them at bay.
In the end, I got way more out of my Wharton gig than a silver Tiffany pen and a signed copy of Strategy from the Outside In, by Professor George S. Day - I got an opportunity to reflect on a lifetime of investing and entrepreneurship.
As a bonus, I now feel truly happy to be turning 50, knowing that I still have from here to there to go before I rest. I will continue to explore strange new worlds, to seek out new life and new civilizations... where stocks are concerned, at least.
Live long and prosper.
And Speaking of Star Trek...
I have the great honor of serving on the board of The Japanese American National Museum with famous Star Trekker George Takei. The secret to his youthful looks is that he is always trying something new, like being on the reality TV show Celebrity Apprentice.
He also has a heart of gold. He has pledged his winnings to the Museum. Go George!
Click here to see George speak about the Museum's Remembrance Project. 2012 marks the 70th anniversary of Executive Order 9066, which resulted in the forcible internment of 120,000 Japanese Americans (George included) during World War II.
And the Winners Are...
Congratulations to Ian H., Leslie R., Shannon C. and Suzanne K. who answered last month's newsletter quiz correctly by guessing that Ellery is the twin on the left!
As promised, winners will receive more Doublemint gum than strictly necessary.