Kevin Daly: Who Is Warren Buffet?

Music is the space between the notes. Similarly, there is space in between investments. These spaces are the times one is out of the market and it is crucial for successful investment. 

In spite of being mostly a net long equity investor, Kevin Daly accomplished cumulative gross returns of more than 800% during those 12 years when the broad equity market indexes were nearly flat. He managed to achieve this because of superior stock selection and also by not participating in the market at the wrong times. Sometimes, being out of the market is important to succeed. 

When the environment is adverse or when there is a lack of opportunity, one must have patience to stay on the sidelines and not take the sub optimal trades. Daly had to be patient for more than two years during the 2000 to 2002 bear market.

His stock investing method and philosophy can be outlined as follows:

• Stick to the businesses you understand.
• Find companies in that business that are undervalued compared to their similar competitors. 
• Book profits when prices move up to the fair valuation stage.
• When the market turns stormy, it is better to ascend into a cash refuge. 
• Stick to the vital system and never take flyers.
• Investments should be treated as a business and not as a gamble. 

$50 million is a small size by the standard of a fund manager. However, Daly manages this small size only because he understands the advantage of managing smaller assets. This is one reason why he has made virtually no effort to raise additional assets. 

Individual investors have an important advantage over large hedge fund managers. It is difficult for large fund managers to enter and liquidate positions without incurring substantial slippage costs. Also, as the assets managed grow, the world of possible opportunities shrinks. 

He has seen many managers who did extremely well while trading smaller asset levels, but experienced significant deterioration in performance when they expanded their assets beyond the optimal level required for their method. They should be disciplined to turn down additional assets when they believe it would deter their performance. It is an important component in longer-term success.