Why We Do What We Do
Successful investors typically have two traits that set them apart:
1. A deep understanding of their investment strategy
2. A level of commitment that allows them to ride out the inevitable periods of underperformance
In short, commitment matters. Building commitment requires asking tough questions and working hard to answer them. Too many investors swap the hard questions for easy questions. Questions like, “what is this company worth?” turn into single dimensional discussions about a new product or customer. Something important gets lost when the hard questions are avoided—the assessment of internal and external factors that could significantly change a company’s future value.
Lacking a deep understanding of a business’ fundamentals and key risks causes both retail and institutional investors to overreact to price changes in the market and under react to fundamental changes in the companies they invest in.
Joel Greenblatt, the founder of Gotham Capital, as well as Jonathon Clements, of the Wall Street Journal , have written and spoken about how hard it is to find a strategy you believe in and how investors are horrible at riding out the market’s bumps. Both Greenblatt and Clements point to research done by Morningstar on the best-performing mutual funds of the last decade (2000-2009).
The top-performing fund earned an average return of 18 percent per year, during a period when the broader market lost close to 1 percent per year over the 10-year period. Yet, the average investor in this top-performing fund managed to lose 11 percent per year on a dollar-weighted basis over those same 10 years.
How?
After every period in which the fund did well, investors piled in. After every period in which the fund did poorly, investors ran for the exit. So, the average investor managed to lose money in the best-performing fund simply by selling the fund at the wrong times. Most professional allocators follow the same pattern as individuals. They pull money out after the market or manager does poorly. They put money in after the market is already up or the manager has outperformed.*
At Otsi Keta, we know commitment is critical for successful investing. We work to combat pervasive group consensus by conducting our own independent research. We focus on finding undervalued businesses that we can truly understand. We stay away from investments that hinge on a single event or technology. Instead, we focus on companies where executional capabilities can be assessed. This results in us avoiding biotech, software, or turnaround companies. We like cash-generative businesses, with little-to-no net debt and management teams that hold a significant stake in the companies they manage.
Every investment is initiated with a clear opinion on what we believe it is worth and a specific investment thesis. We acquire positions when they are at least 25 percent below our estimate of fair value—applying Benjamin Graham’s well-known “margin of safety” in our investment process.
Diversification, while a great investment technique, is a poor substitute for knowledge. We stay focused on our best ideas—never holding more than 20 individual positions at any point in time. And, we never allow any single position to exceed 9 percent of investable assets.
Today’s investment funds are often built for asset gathering and not returns. We believe, and history is on our side, that small companies represent the best longterm opportunities for compounding capital. Having too many positions or too large of a pool of capital dilutes the returns a manager can earn for their investors.
If you want to have a deep understanding of your investment strategy and be able to ride out the inevitable bumps in the market, then the Otsi Keta Focus Fund, LP may provide the right combination of attributes to help compound your capital over time.
*Gotham Funds, Morningstar “Best stock Fund of the Decade”
FRED ROLLINS
Mr. Rollins’ career has benefited from significant experience in industry, management consulting, and private equity investing. The depth and breadth of these experiences give him a unique perspective on assessing the strengths of potential businesses, as well as their investment potential.
After graduating from the University of Michigan in Economics, Mr. Rollins worked in operations management for Chrysler Corporation. His early management experience gives him clarity around the challenges large-scale operations face when responding to dynamic markets. He left Chrysler to attend business school at Wake Forest University as a Babcock scholarship recipient.
After completing his MBA in Finance with distinction, Mr. Rollins became a management consultant and progressed to Principal with San Francisco based Swander, Pace & Company. While at the firm, Mr. Rollins focused on mergers and acquisitions (M&A), competitive assessments, and identifying strategic growth opportunities for clients.
Working primarily with Fortune 500 clients in the consumer goods industry and private equity firms, he was personally involved with over $1 billion in M&A activity and due diligence projects. Careful due diligence and deep research were hallmarks of Swander, Pace & Company and are core to Mr. Rollins approach to investing. His experience at the firm reinforced his belief that you don’t beat a competitor in the marketplace, rather you beat his strategy.
In 2002, following the sale of the Swander, Pace & Company to a larger multi-national firm, Mr. Rollins, a native of Michigan, returned to the state full-time to start a family with his wife. Since returning to the Midwest, he has made a number of private equity investments within the region. Mr. Rollins currently serves as a director for Midwest Athletics and Deep River Energy.
With a strong background in evaluating management teams, company financials, and product development initiatives, Mr. Rollins is able to focus in on the most important elements of company’s business plan. His career researching, framing and analyzing strategic growth initiatives serves him well as the Co-manager of the Otsi Keta Focus Fund.
Mr. Rollins maintains a permanent residence in Grosse Pointe, MI with his wife and two children.
BILL SCHWARZ
Mr. Schwarz’ investment experience has spanned more than two decades with successful roles at three regional and one national financial firm. Mr. Schwarz has spent his career working and investing in the domestic markets with an emphasis on small-cap equities.
Before receiving a Bachelor of Science degree from Michigan State University in East Lansing, Michigan, Mr. Schwarz purchased a seat on the Winnipeg Commodity Exchange to gain experience in trading commodities and like products. This successful pregraduation experience allowed him to move quickly through the ranks of his first job.
Mr. Schwarz started his career on the equity-trading desk at Olde Discount Corporation in Detroit, Michigan. Working with Olde through the 1990’s, he worked his way up from a trading assistant to making markets in small and mid-cap stocks in 1993. Mr. Schwarz became an Assistant Vice President of Nasdaq trading in 1995, and a Vice President for the firm in 1997. Mr. Schwarz became the head of OTC trading in 1998.
With the sale of Olde to H & R Block in 1999, the trading desk transitioned from a principal at-risk operation to an agency desk. This fundamental change saw Mr. Schwarz leave Detroit after ten years with Olde to be part of a growing investment bank in San Francisco with W. R. Hambrecht & Company LLC.
Having the experience from the trading desks, the analytical experience from the asset management department at Citizens First Bancorp, and the sales experience from Wells Fargo Advisors led Mr. Schwarz to co-found Otsi Keta Capital, LLC.
Mr. Schwarz’ roles at the firm are focused on obtaining competitive prices on securities that the firm is investing, analyzing companies for the portfolio, and outside sales. His extensive knowledge around small-cap markets puts the firm at a distinct advantage over would-be competitors. His industry background affords limited partners the benefits of a Wall Street veteran.
Equity research is a cornerstone to Otsi Keta Capital’s business model, and Mr. Schwarz shares this role with the other founding partner. Combining a technical and fundamental background has allowed the firm to find high-quality companies at competitive prices. The partner’s strong midwestern roots also play well with the management teams that the partners meet on a regular basis.
Mr. Schwarz maintains a permanent residence in East China, MI with his wife and two children.