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
Youd 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



Everyones pitch books sound like an episode of

My Background
Ellen Adams
I have no problem sharing. Ive 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 Youre 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
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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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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
Lowes 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 Cant 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
Lets
Ellen Adams, Portfolio Manager Long/short Strategy
Daruma Capital Management, LLC
Where Every Stock Counts