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Investing in Learning Organizations
Tarkio Fund
Interview with: Russ Piazza

Author: Ticker Magazine
Last Update: Sep 13, 9:56 AM EDT
Great managers bring a clear vision and create a lasting management culture that empowers employees, generates customer loyalty, and sustains superior financial performance. For Russ Piazza, portfolio manager of the Tarkio Fund, such businesses have the potential to create long-term wealth for investors with a steady focus on quality and value.


ďOur criteria are based on the assumption that great managers can create a corporate culture of empowerment for their employees that results in strong customer loyalty and company performance over time.Ē
A: The Container Store is another company that has embraced the idea of conscious capitalism. John Mackey, the current CEO of Whole Foods, and Kip Tindell, the founder of The Container Store, are on each otherís boards. They both share a commitment to an employee oriented management style.

The retail environment has been undergoing a dramatic shift during the last few years and that will certainly have an impact on companies like The Container Store. It will be a great test case for their management style to see if they can effectively navigate their business through a really challenging period.

We bought the majority of that stock when it was priced in the $3.00 range, and it is now at $6.00. The company has a higher debt load than we like, but if they didnít have that debt we might have taken a larger position. Our position in the name is just over 1% of the portfolio, and we are not planning to add to our position at this point.

Q: What is your sell discipline?

A: From the beginning, our plan was to find stocks that we would buy and hold forever. A security would only be considered for sale only if the companyís culture were to break down or the management significantly changed to render our analysis invalid. We rarely reduce our position in a stock just because itís gotten overpriced. Periodically, we might do a little buying and selling if the company is in a cyclical industry, but quite rarely.

Q: Where does the portfolio fall in the market capitalization range?

A: We donít label ourselves as a mid-cap fund, and we have the flexibility to invest across the capitalization range. Everything else being equal, we would rather own a small company than a large company because small companies usually have greater potential for faster growth.

But there are some advantages to larger companies because they have had time to develop their cultures. A perfect situation for us would be to find a small cap that has embraced a qualitative culture and then grows a large cap company.

Q: What drives your portfolio construction process?

A: We undertake our search process every day looking for great companies that meet our criteria. Only when we have identified the perfect company and the entry conditions are right, do we make a move. When we decide to buy, we try to add as much as possible. Ideally, we would like to maintain the portfolio with between 20 and 40 stocks.

In valuing a company, we conduct a discounted cash flow analysis. Then make a judgment as to the rate at which the company is likely to compound their earnings over time. That provides us with a benchmark in making a decision as to the proper entry point.

We are currently experiencing a fair amount of inflows - particularly given the size of the fund. Our biggest challenge right now is making sure that we allocate those inflows properly. When the price of our great companies falls within a reasonable price, we want to make sure that we get all we can afford to buy at that price. It is really a matter of being very opportunistic and looking for reasonable entry points. We donít chase a stock after it gets out of our price range.

Q: Is there any limit to position sizes?

A: In general, we will not add to a position once it has reached 8% to 9% of the portfolio. If a position were to appreciate beyond that point, we might let it increase to 15%, but the decision is really situation dependent.

Q: What types of risk do you focus on?

A: Every company faces challenging situations from time to time. We believe that the companies we have identified have the ability to overcome those challenges. Herman Miller is a good example. When they recently released quarterly earnings, they announced their success at bringing their products into the home and office market with a different distribution model. They had been trying to do this for 30 years and finally found the right solution.

We think these companies that have the right cultures will eventually find the right solution to any challenges they face. So, our strategy is to stick with them as long as they maintain the right culture.

When they face a challenge and the price of the stock pulls back, it gives us an entry point. The companies that really are risky are the ones that donít have the management culture. When they run into a challenge, it could be the end. Those are the companies we want to avoid.

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