Zeke Ashton Interview

Zeke Ashston runs Centaur Capital Partners, which is a value-oriented hedge fund in Texas. The following summary is taken from the newsletter The Manual of Ideas.

As the interview points out, “In 2008, the Centaur Value Fund was down 6.9%, trouncing the 37.1% and 40.0% declines of the S&P 500 and Nasdaq Composite indexes. From inception in August 2002 through the end of 1Q09, the Centaur Value Fund gained 134.6%, net of fees and expenses, versus returns of 15.1% for the Nasdaq Composite and -0.3% for the S&P 500 Index.

Here are some “nuggets'” from the interview:

1. Ashton did well in 2008 not because he predicted what was going to happen – something he seems skeptical could be done on a consistent basis – but because he designed a portfolio that incorporated good risk management.

2. He keeps risk management simple. For example, he limits the portfolio’s exposure to any one segment, such as retail, to 20%. If he is at this limit in a given sector and he wants to purchase more, it forces him to sell something.

3. Another risk management rule is to limit exposure to stocks with limited liquidity to no more than 30% of the portfolio.

4. He finds the Kelly Formula interesting on a theoretical level, but flawed when it comes to real-world investing because in a period of severe stress the level of correlation between all asset classes is too high.

5. Notwithstanding the foregoing, he believes in a focused portfolio and typically has 50-60% of the portfolio invested in his top ten ideas.

6. He characterizes his style as “high probability” as opposed to swing for the fences with large, individual bets.

7. Ashton sometimes uses long-term options to establish a position. This gives him a kind of non-recourse loan which limits his downside exposure. Even when he uses options, he sizes his position so that he controls the same amount of stock as if he was long the common.

8. Ashton’s core selection criterion is a meaningful discount to intrinsic value. He prefers high quality businesses where the intrinsic value is growing, but he will settle for mediocre businesses if the discount is great enough.

9. On the short side he looks for businesses that are 1) burning cash, 2) have too much debt to service, 3) fads, 4) use overly aggressive accounting to overstate their true economic value, or 5) are highly overvalued.

10. He generates idea with computer screens, revisiting past ideas, industry overviews, his network of contacts, and specialized research such as The Manual of Ideas.

(read the entire interview beginning on page 27)

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