My 36-Year-Old Recipe for

Ellen Adams, Portfolio Manager
Daruma Capital Management - Long/Short Strategy

Mistakes are the
portals to discovery
– James Joyce
Mr. Market is Merciless
You‟d think most investment firms would be filled with


• Mistakes are served up regularly
• Being correct 65% of the time makes you a legendary
manager



mistake-analyzing zealots
Mistake Analyzing Zealots? Hardly

• They hire the smartest people
• They pick the best stocks
• They have a seemingly flawless process



Everyone‟s pitch books sound like an episode of

My Background
Ellen Adams
I have no problem sharing. I‟ve been making mistakes for over 36 years …
CastleRock Management: 1998 – 2011
Chancellor LGT: 1992 – 1997
Neuberger Berman: 1987 – 1991
Scudder, Stevens & Clark: 1977 – 1982
Daruma Capital Management: 2012 – 2014
Omega Advisors: 1992
Citicorp Investment Management: 1983 – 1987
Mental Filing System for Lessons Learned
Name Proliferation Kills
Execution is as Important as Ideas
Knowing What You’re Good At
Behavioral Dysfunction

Name Proliferation Kills
Pitfalls of Position Proliferation
Lack of Conviction

0
10
20
30
40
50
Pitfalls of Position Proliferation
Lack of Conviction
Tyco


• Ticker: TYC
• Period: 2001-2002
• Purchased: Mar ‟01
• $34
• Fast forward: Dec „01
• Up +35%
• Fast forward: Dec „02
• Down -66%

12/8/2000 - 12/30/2002
P
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Pitfalls of Position Proliferation
Greed-Induced Name Creep


0
20
40
60
80
100
120
Pitfalls of Position Proliferation
Greed-Induced Name Creep
Equinix + Savvis


• Ticker: EQIX
• Owned: 2003-2007
• Return Profile
• Up +400%


• Ticker: SVVS
• Owned: 2006-2007
• Return Profile
• Made some, then
• Lost -40%
20
30
40
50
60
12/8/2006 - 12/30/2007
5/9/2003 - 12/30/2007
P
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EQIX
SVVS
P
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$
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Pitfalls of Position Proliferation
Dreaded Trading Idea
Pitfalls of Position Proliferation
Dreaded Trading Idea
Tenet Healthcare


• Ticker: THC
• Period: 2002-2003
• Scenario
• Up +30% on year
• Controversy Erupts
• Down -30%
• Continues down


0
50
100
150
200
250

12/10/2001 - 9/30/2003
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Pitfalls of Position Proliferation

• Ticker: BSC
• Rewind to: Dec ‟08
• Return Snapshot
• Down -25% on the day

Ignorance
Bear Stearns


Pitfalls of Position Proliferation
Benefits of Concentration
• Eliminates “invest first, investigate later” syndrome
• No deadwood – every stock counts
• Mindset is never to “get back to even”
• Focused on gestation period
• Early is the same as being wrong
• Work the capital hard
Time
Horizon
Return
Execution as a Long Term Investor


• Fast Forward: Jun „06
• Return Snapshot
• GLW: Down -42%
• WFR: Down -45%
• EQIX: Down -28%
• NIHD: Down -32%


9/9/2005 - 12/30/2006
0
5
10
15
20
25
30
35
GLW


0
10
20
30
40
50
60
WFR (now SUNE)


0
10
20
30
40
50
60
70
80
90
EQIX
0
10
20
30
40
50
60
70
80
NIHD
Execution as a Long Term Investor

• Rewind to: May „06
• Return Snapshot
• GLW: Up +52%
• WFR: Up +118%
• EQIX: Up +52%
• NIHD: Up +52%
• Portfolio: Up +19%

The securities listed on this page and the corresponding prices should not be considered recommendations to buy or sell any security, nor should you presume that
any of them were or will be purchased for the fund at the price shown, or at any price, or that they have been or will be profitable investments. Price targets are set
based on our opinions, beliefs and expectations about the future; subsequent events may impact whether those come to pass and may cause us to change our
expectations.
Execution as a Long Term Investor
• Rare that trims at 6 month target lead to opportunity cost
• Manages net exposure
• Lowers the colatility
• Allocates capital to best risk/reward positions
• Avoid stocks with unclear 2 year merit
• Avoid stocks with less than our targeted 50% return potential
Benefits of a Price Target Discipline

Discipline – Know Yourself
What are my strengths as an investor?
What are my weaknesses?
Macro Overlays

Discipline – Know Yourself
Force you to put on your
“macro-investing hat”
Discipline – Know Yourself
Index Options

Expensive insurance
ETFs
Psychological crutch

Discipline – Know Yourself
Retail ETF
Stock Weight
Wal-Mart Stores 10.9
Amazon.com 9.6
Home Depot 7.4
CVS Caremark 7.1
Walgreen 5.1
Costco Wholesale 5.1
Lowe‟s Cos 4.9
Target 4.6
TJX Cos 4.5
McKesson 4.3
Total 64
Discipline – Know Yourself
Futures
Index Options
ETFs
PSYCHOLOGY 101
Behavioral Dysfunction
Hubris
Behavioral Dysfunction
Hubris
MEMC Electronics


• Ticker: WFR (now SUNE)
• Period: 2003-2008
• Purchased: May ‟03
• Return Profile
• Up 1200% by the end of ‟07
• Factory fire – down -30%
• Pricing collapse – story over
0
10
20
30
40
50
60
70
80
90
100
5/9/2003 - 12/30/2008
WFR (now SUNE)
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Assignment of Credit
Behavioral Dysfunction
Behavioral Dysfunction
Assignment of Credit
Oil Analyst


Insert
image

• Industry: Oil
• Period: Spring „10
• Exposure: 18%
• Goal
• Reduce exposure greater than 50%
• Rationale
• Take profits
• Worried about global growth slowdown
• Execution
• Fails due to misaligned goals
You Can‟t Kiss All the Boys/Girls
Behavioral Dysfunction
Behavioral Dysfunction
Working Well With Others
Ask the Analyst
Behavioral Dysfunction
Shame as a personnel management tool

Working Well With Others
Always Tweaking the Recipe

Keep In Touch.
80 Field Point Road,
Second Floor
Greenwich, CT 06830
203-489-5970
ADDRESS
Phone
Website:
www.darumact.com
www.darumanyc.com
Let’s
Ellen Adams, Portfolio Manager –Long/short Strategy
Daruma Capital Management, LLC
Where Every Stock Counts ®

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