December 2013
Vol. 6 No. 11  
in this issue
Smart Phones, Smart Doctors and Global Super Bugs

Zombies to the Rescue!"






logo - Daruma







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










 
 
About Us

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

Daruma manages $2.3 billion for public and corporate pension plans, endowments, foundations, and individuals. Our annualized Small-Cap return net of fees since inception is 13.3% vs. 8.7% for the Russell 2000 (7/28/95 to 9/30/13). Our annualized SMid-Cap performance net of fees since inception is 10.8% vs. 14.8% for the Russell 2500 (4/30/10 to 9/30/13).   

 

Notes to Performance

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







Hello!

 

Playing video games doesn't usually translate into investment insights. 
 
This month, however, and thanks to my world-class epidemiologist neighbor and our mutual obsession with the game Plague, Incorporated, I share how tracking "infected people" and scorekeeping in our business run parallel.

Play on!
 
(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 Smart Phones, Smart Doctors and Global Super Bugs

One of our neighbors is a world-class epidemiologist. He travels the globe, tracking down outbreaks of weird diseases and helping countries fight bioterrorism.

Given these credentials, it's ironic that he is also the one responsible for infecting my family with an impossible to eradicate "superbug" - one that spreads quickly among humans, not by fleas or tainted water, but via smartphone.

Yup, Dr. Ian Lipkin, the John Snow Professor of Epidemiology at the Mailman School of Public Health at Columbia University, has gotten us incurably addicted to the video game, "Plague, Incorporated."

Given Dr. Lipkin's job description, I wouldn't blame you for thinking that the game's objective is to save the world from some new Andromeda Strain. But you'd be wrong. With Plague Incorporated, you must channel your inner misanthrope and try to kill every human on the planet.

This is not as easy as it sounds (fortunately).

Make your plague too deadly, and it won't infect enough people. Make your plague too mild or not contagious enough and the heroic doctors housed within the game will find a cure and wipe you out. As a result, the game makes you strike a tough balance between being lethal and being speedy.

As you might imagine, keeping score against the "villainous" doctors trying to save the world, is complicated. Dr. Lipkin himself, despite a lifetime devoted to the pursuit of deadly microbes, has yet to beat the game, much to his disgust.

Interestingly, all the counting up of millions of people still alive post plague got me to thinking about the scorekeeping we do in this business. As the year ends, whether bull or bear market, the time of reckoning draws near.

Now, mind you, scorekeeping happens all year round. But there's something about the nights getting longer and the coming winter solstice that creates an extra level of soul searching.

At Daruma, here are the things we ponder as we perform a post-mortem on the year's performance:
  1. What percent of the stocks we owned over the last year and three years went up? And by how much compared to those that went down? It's easy to focus on the "hit rate," but if the pluses are small and the minuses are big, having a positive hit rate isn't going to do much good.
  1. Did we add any value with adds and trims? Did we do a better job when we added or trimmed on the way up, or when we added or trimmed when the stock went down? Did we waste too much energy chasing squirrels when we should have focused on elephants? Activity does not always translate into returns.
  1. How did the stocks that we sold do compared to the stocks we replaced them with or decided to keep? "Out of sight, out of mind" means that we risk scoring ourselves only for what happened, and not for what could have been.
  1. How did we spend our time? Since one team is responsible for two products, did we allocate our time properly between the two? And while we're at it, did we get the right balance of new ideas versus maintenance research? And did we have the right mix of tasks - calls with analysts versus field trips to companies, for example? It's easy to look at results without examining the success of the actions that led to those results.
  1. How did we perform on an absolute and relative basis - in addition to the benchmark, sectors and industries - against the true investable universe? Not every stock in a small-cap benchmark in particular can be bought, as there are many teeny and illiquid banks and companies. Did we catch the best possible fish in our pond?
As we tally up our choices, good and bad for the year, all of these real-life tradeoffs must be scored, just like the choices required by Plague, Incorporated.

In both cases, whether dealing with a global epidemic or an investment process, the components must be just right: Not too lethal (don't do damage to returns), and just the right amount of contagious (spread the stuff that works).

Wishing you and yours a happy and, ahem, healthy holiday!

 
articleTwo Zombies to the Rescue!

In case you thought zombies were all bad news, have a look at this recent article from The Physics arXiv Blog, entitled, "Mathematical Model of Zombie Epidemics Reveals Two Types of Living-Dead Infections."

According to the article, two researchers from Bryant University in Smithfield, Rhode Island have found a close correlation between real world epidemics and the way zombie infections spread in popular horror movies.

The benefit? "Studying different types of zombie dynamics, although obviously fictional, are extremely useful in constructing real-life disease models."

So remember, the next time you sit down to watch your favorite flesh-feasting-flick, you're not wasting time ... you're conducting epidemiological research!


© 2013 Daruma Capital Management LLC


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