RCM Editorial: Success in 2008

2008 was a defining year for Rosenthal Capital Management. While the market averages collapsed (S&P500 down 41%, Dow30 down 36.2%, and the NASD Comp. down 42.8%) the Fortune's Favor Family of Funds escaped unscathed. In fact, our flagship fund, Fortune's Favor I, experienced an increase of 3.4% net of all costs, and the Fortune's Favor Precious Metals Fund increased 4.99% net.

Due to this success we are entertaining requests to open up the Funds to new investors. As we go through the process and decide the best course of action we are asked the same barrage of questions: What is your approach? Why were you able to increase net worth in '08 while your peers suffered? Is your focus momentum or value, or some sort of black box trading scheme? The answer to these questions, I fear, will be considered mundane. If potential new investors are waiting for a sexy response I hate to disappoint, but alas there is no magic formula. Perhaps it is best to answer what we are not and in the end they will see where the truth lies:

We do not have a black box secret we need to keep. As experience shows, secrets are manure for impropriety. We are completely trasparant, sorry to bore you.

We do not invest in illiquid assets and attempt to place (or markup) a value on them at the end of each month.

We are not MIT grads with a computer system designed to exploit inefficiencies. These inefficiencies exist in a particular environment and often evaporate as the system functions and markets change. This process makes long term results problematic. Evidence John Meriwether's checkered past. Long-Term Capital Management resulted in the infamous $3.8 billion bailout in 1998 and yet he was able to attract investors again (moths to a flame) only to lose more than 40% in '08.

Above all, we do not employ excessive amounts of leverage in assets such as Credit Default Swaps that have no liquidity at all. We will leave that to our high profile friends at Citadel and Fortress who learned a few painful lessons in '08.

I know it may be disappointing, but we have never employed any of the above esoteric techniques of money management. We have deliberately remained isolated from the rest of the hedge fund community; as a result our portfolio is not infected with the flavor of the month investment scheme. We have never engaged in the Yen carry trade and gambled on the future price of commodities which brought so many hedge funds to their knees in '08.

We simply employ 65 years of combined investment experience to identify current macro-trends that often lead us to compelling investment themes. We then work hard to uncover the groups and individual companies that can best exploit our vision. These companies can be large, mid, or small cap. We do all of our own fundamental work and keep a keen eye on the liquidity of each position. We also engage a computer system to help (I stress help) us identify entry and exit points. Our approach is not rigid in any way. Our primary strength is our constant effort to reinvent ourselves and remain fluid while interacting with a market that is ever changing.

Above all, we believe the most important underpinning of our success is that we are the single largest Limited Partners in our Funds and we intend to keep it that way. Preservation of capital is a critical discipline for us because a significant portion our own assets are invested in the funds. We do not aggressively employ leverage with the hope of generating amplified incentive fees. We are not striving to build a castle in the sky; we are already living in it and so we follow the axiom that the return of capital is as important as the return on capital. Remember, any fool can make money in a rising market and most fools do. But all fools will be eventually separated from their money.

Please take a moment to visit the Rosenthal Capital Management website. You will be able to view our personal investment track record of almost 11 years prior to founding the Fortune's Favor Family of Funds. From May 1995 to January 2006 we transformed a starting rollover IRA of $477,000 into $11.8 million with only 2 single digit down years. The key to successful compounding is not making money but the ability to not lose materially in down markets. Therefore, the cornerstone of our management philosophy is to protect assets during difficult times and strive to maximize returns only when we perceive the window of opportunity to be open.