March 2013
Vol. 6 No. 3  
in this issue
Musings of a Psychopath

Where to Get Your Business History Fix, Redux

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Daruma Capital Management LLC
80 West 40th Street, 9th Floor
New York, NY 10018   

About Us

Founded in 1995, Daruma Capital Management invests in high-conviction portfolios of no more than 35 stocks.

Daruma manages $1.7 billion for public and corporate pension plans, endowments, foundations and individuals. Our annualized Small-Cap return net of fees since inception is 12.1% vs. 7.6% for the Russell 2000 (7/28/95 to 12/31/12). Our annualized SMid-Cap performance net of fees since inception is 3.6% vs. 9.5% for the Russell 2500 (4/30/10 to 12/31/12).


Notes to Performance

For more information about the work we do, please visit us here

Today's newsletter takes a look at the positive characteristics of psychopaths (yes, I said "positive"). 
In particular, we explore their uncanny ability to remain calm when others can't and the positive impact this has when making investment decisions.
(To listen to this month's newsletter, click here.)

All the best,
signature - Mariko 
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Capital Management LLC 
articleOne Musings of a Psychopath

I may be a psychopath. This scary thought is not the result of discovering a bunch of unidentified body parts in the freezer, nor is it a consequence of my having flunked a Cosmo personality test in the supermarket checkout line.

Perhaps the possibility of my being a psychopath does not surprise you at all, given the conventional wisdom that business in general, and our industry in particular, attracts such miscreants. You know the type - the Gordon Gekkos of the world, as depicted in movies like Wall Street.

However, as you may know, this firm was founded on quite the opposite premise: We believe that the traditional dog-eat-dog, eat-what-you-kill model creates selfish behavior that may not be in the long-term interests of either the portfolio or the clients.

When we began, we were determined to prove that an investment process based on collaboration would lead to more intellectual honesty, make the most of each team member's strengths and would generate better performance over the long-term, precisely because unselfish behavior was expected and rewarded.

So it was more than a little unsettling when my tidy world of "psychopaths = bad; non-psychopaths = good," was upended last week, as I read The Wisdom of Psychopaths: What Saints, Spies and Serial Killers Can Teach Us About Success by Kevin Dutton.

According to Dutton, psychopathy is not an either/or condition, nor is it entirely negative. Rather, it is best thought of as a spectrum - one where serial killers reside at one extreme, and other, often highly successful people like CEOs, Navy Seals, surgeons, and professional athletes, live at the opposite end.

And they are different from the rest of the population - in both the way they're wired (literally), as well as in their physiological responses to stressful situations. In short, psychopaths keep their cool when others don't.

We know that humans are predisposed to "catching" fear from others. We also know that fear causes most people to go into a highly aroused physiological state, one that clouds their thinking and judgment as they ruminate and fantasize over impending doom.

In sharp contrast, when the stakes are high, a psychopath's arousal level actually decreases - these people appear to be immune from fear contagion and are able to make faster decisions.

Their attention is not only more focused, it's more focused on the present, an orientation that causes their anxiety levels to be much lower.

It makes sense. One of the well-documented benefits of mindfulness practice is a reduction in anxiety. If you stay focused on the present, you are unburdened by the past and do not fear the future.

Indeed, from a scientific point of view, a psychopathic state of mind is not unlike that of a Tibetan monk who is a master of meditation. It turns out that elements of psychopathy are not unlike elements of spiritual enlightenment. Don't believe me? Consider the following.

Dutton states: " isn't so much the case that psychopaths don't feel anxiety in certain situations, but rather that they just don't notice the threat. Their attention is focused purely on the task at hand, and extraneous distractors are ruthlessly filtered out."

Doesn't this sound an awful lot like this description, by Theravada monk Bhikku Bodhi and quoted by Dutton, regarding what the practice of meditation brings?

"In the practice of right mindfulness the mind is trained to remain in the present, open, quiet, and alert, contemplating the present event. All judgments and interpretations have to be suspended, or if they occur, just registered and dropped."

Suddenly, it all made sense to me.

The best investors I know are those who don't flip out when the wheels are coming off one of their positions, their portfolio or the markets; who are willing to remain nonconformist in the moment so that they may strike while everyone else panics and profit out of everyone else's fear and confusion. In other words, they are psychopaths.

The best investment decision about a position that is emotionally laden - and here emotionally laden means that it's either gone up a lot or gone down a lot - is one that is untainted by all judgments and interpretations (a.k.a, the "stories" we tell ourselves).

The investment case must be made in a completely detached way. A stock doesn't care whether you own it or not, or whether you had a good or bad "relationship" with it during the course of your ownership. A stock is not your friend. It doesn't give a crap about you, and you should reciprocate that indifference.

All of my investment process mistakes (as opposed to all my bad outcomes - this is an important distinction, as one can have bad outcomes despite a good process) have always come from a place of emotion. Every single one, whether it was a purchase or a sale.

By contrast, my best decisions in fraught times have been when I have accessed that place of flow and clarity by being entirely detached emotionally. It turns out that for someone who tends to be very expressive and prone to hyperbolic language, I can be quite cold blooded and calculating when I need to be, for the good of the portfolio.

It amuses me no end that despite trying not to create a stereotypical psychopathic culture at Daruma, I actually aspire to the positive attributes of true psychopaths (or Tibetan monks, I suppose, to make it more palatable).

And of those phone-tossing, expletive-hurling, Gordon Gekko types, many of whom went into deer-in-the-headlights shock, paralysis and hiding during the Great Financial Crisis of '08? I don't think they were psychopaths at all - just badly behaved wimps.


articleTwo Where to Get Your Business History Fix, Redux

Thank you to Peter C., Liz H. and John C. who responded - with vigor! - to our book request last month for favorite business or investing histories.

Two books were recommended more than once: And here are the rest:
  • Margin of Safety by Seth Klarman (out of print)
Happy Reading!

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