September 2013
Vol. 6 No. 8  
in this issue
Van Halen, Tattoos and Brown M&Ms;

Stalking the Tattoo Tradition

The Daruma Portfolio Playlist

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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 $2.1 billion for public and corporate pension plans, endowments, foundations, and individuals. Our annualized Small-Cap return net of fees since inception is 12.8% vs. 8.3% for the Russell 2000 (7/28/95 to 6/30/13). Our annualized SMid-Cap performance net of fees since inception is 8.1% vs. 12.9% for the Russell 2500 (4/30/10 to 6/30/13).   


Notes to Performance

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

A chance encounter over Labor Day Weekend with rock legend David Lee Roth got me wondering what we money geeks could learn from a shrewd businessman who's much younger than his 57 years.
Today's newsletter offers three suggestions, culled from the lively example of "Diamond Dave." 
(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 Van Halen, Tattoos and Brown M&Ms;

I don't usually hang out with rock stars or in tattoo parlors. But Labor Day Weekend had me chillin' with David Lee Roth of Van Halen, at Kings Avenue tattoo on the Bowery.

Well, sort of.

I was on one side of the studio hanging out with artists Kip Fulbeck (dear friend) and Taki Kitamura (new friend) while they were photographing people (men, mostly) with large tattoos (some with full body suits) in the Japanese tradition.

These large-area tattoos are a true commitment, nothing less than masterpieces in the Ukiyo-e tradition (see photo next article) and the result of a lifetime collaboration between tattoo artist and human canvas. The tattoos can take up to a year and a half to create, not to mention the pain involved.

At the end of the shoot, a portrait of The Kings Avenue tattoo artists was taken and a guy who owner Mike Rubendall had been working on all
boyz afternoon was invited to join in. And did he ever. He leapt into the fray (literally) and immediately began clowning around, resulting in this great picture.

I asked who the life of the party was:

"David Lee Roth."

"Sounds familiar. Who's he?"

"He's in a band called Van Halen."

"OMG! That's the brown M&M; guy?"

Yes, it's true, I am indeed a world-class nerd. Someone mentions a Rock and Roll Hall of Fame musician (as I later learned) and the only reason I've even heard of him is because I'm a total business groupie.

Let me explain.

Earlier in the year, for weeks on end, it seemed that I couldn't pick up a book or read an article without finding a reference to David Lee Roth and his infamous "M&M; clause." It seems that Diamond Dave, while better known for his acrobatics and music-related talents, is also a shrewd businessman.

Van Halen was one of the first bands to have world-class pyrotechnics during its shows, and safety was critical. So Roth snuck a clause into the middle of his lengthy contracts requiring that the green room be stocked with M&Ms; and that all the brown ones be removed.

The first thing the band did upon arrival at a gig was to see if there were any brown M&Ms; in the bowl.

If there were, they knew that the venue did not pay attention to detail and that they'd have to triple-check the setup. If there weren't any brown M&Ms;, they could relax, knowing that the venue would carry out the band's instructions to the letter.

Observing the rock (and business!) legend in the flesh made me ponder what we money geeks could learn from him. Three things came to mind.
  1. Stay Fit.

    As a musician, Roth is known for his acrobatics. He is still ripped, and looks a good fifteen years younger than his biological age (57).

    He came without an entourage and asked for no special treatment, getting tattooed in public like everyone else. High energy, full of life and incredibly gracious to the fans who came up to chat (while he was getting worked on!). He was clearly a man who delights in being alive (way more Tigger than Eeyore).

    While we stock-pickers don't have the stress of entertaining millions, we do marinate in a stew of stress hormones daily, a biological concoction which may explain why we tend to be fat and grouchy (or perhaps I should speak for myself).

    I'm told that 30 minutes a day of movement flushes out the fight or flight hormones, and that daily meditation eases the soul. That means we will live longer and think clearer, both of which are good news for our clients, who won't have to worry about our premature retirement (or expiration).
  1. Embrace discomfort.

    As far as I could tell, DLR doesn't have other tattoos - he'd signed up for one of those large, wearable art commitments years ago and was in getting it recolored to keep it fresh. He was going beyond his physical comfort zone and embracing it wholeheartedly.

    On the flip side, I'm continually amazed at how resistant to change so many of my brethren are.

    But the world is constantly changing: new research, new tools, new facts, new technology, new business models, new financial instruments and more. Clearly, being good at this job means being comfortable with ambiguity and uncertainty.

    So why not embrace the new and refresh the old? I may love novelty to a fault, chasing after any shiny new object that can help our research process, but I would rather embrace the ever-changing than be closed-minded, fossilized and afraid of it. If you're not constantly looking to improve your investment process - and by this I don't mean changing your values or discipline, I am talking tactics - then you may as well hang up your guitar.

    DLR wasn't changing the tattoo on his back, but he was keeping it fresh.
  1. Get some brown M&Ms.;

    It's extremely difficult to separate process from outcome in our business. Even so, we can build within our process the equivalent of the brown M&M; test. In other words, what can we do to make sure that we are paying attention to detail, so that whatever investment pyrotechnics occur, there's no resulting mayhem and havoc?

    For us this means creating consistent documentation of our investment case, our research updates relative to milestones, and the reasoning behind our valuation targets. Keeping track of what's stale and what's missing in our research workflow is our way of making sure there are no brown M&Ms; lurking about.

    We still may have lousy outcomes from time to time, but psychologically they're easier to bear knowing that we did all that we could, as we promised. It allows us to develop resilience and an open mind for the next opportunity.
And speaking of embracing discomfort, I plan to: 1) listen to some Van Halen, 2) buy some brown M&Ms; and 3) get with the fitness and meditation program. I'm still debating the tattoo....

japanese tattoo tradition

articleTwo Stalking the Tattoo Tradition

Having gotten a private sneak preview last week, I can't wait for Kip and Taki's show, Perseverance: Japanese Tattoo Tradition in the Modern World.

It opens at the Japanese American National Museum next March.

articleThree The Daruma Portfolio Playlist

Since we bought Pandora last year, I've become way, way more interested in music and all the ways in which it's served up to the world. This made me think of creating a "portfolio playlist" - songs that capture some essence of the stocks in our portfolio.

I began by asking Dominic Paschel, who does Investor Relations for Pandora, what their song would be. He promptly shot back Katy Perry's "Roar," along with "Don't Stop Believing," the signature song of the band Journey, which was the IPO's codename.

So I asked the rest of Daruma to join in the fun:
  • From analyst Michael Bostler, for medical device maker Volcano: Celine Dion's "My Heart Will Go On." Volcano makes devices used in angioplasty that improve outcomes and reduce health care costs over the long run. We hope that it will prove to be as big a hit.
  • From senior analyst Mark Miller, for commercial real estate data provider CoStar Group: "Route 66," performed by Nat King Cole. CoStar's fleet of bright yellow cars hits the road from coast to coast, documenting commercial sites for their database.
  • From controller Robert Motch, a country song where you don't lose your wife, house, truck or dog: "Dust on the Bottle" by David Lee Murphy. "There might be a little dust on the bottle... it's one of those things that gets sweeter with time," brings to mind railroad equipment maker Wabtec, in business since 1869.
  • For me, it's "These Boots Are Made For Walking," by Nancy Sinatra, in reference to Crocs. Not only are they expanding into year-round footwear including boots, their stock has stomped on the portfolio from time to time this year.

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