Chad Brand: Founder of Peridot Capital – “Commit to Your Strategy”

Chad Brand became a Wall Street junkie at an early age.  Since stumbling upon Wall Street accidentally at age 12, Chad has been intrigued by the world of investing and learned to invest with real money early on.  Now as a seasoned investor, he has been helping others absorb his knowledge as a founder of Peridot Capital and a Genius kaChing investor.

Peridot Capital now boasts the 2^nd highest kaChing IQ at 162 (as of Nov ’09), and he has already amassed $350,000 in customer asset in less than a month.  Today I share with you our interview in which he dives into the details of his investment strategy.  Read the interview and learn from this kaChing Genius investor what it takes to succeed in the art of investing.

“So Chad we know that you’re the founder of Peridot Capital, and you’re clearly performing very well based on kaChing performance. Well, what can we know about you? Can you tell us more about yourself? How did you get to where you are today?”

Well, I got hooked on the stock market very early on in my life (around age 12).  From that point on, I really knew that I wanted to pursue it as a career. That might sound hard to believe, but one day I was checking baseball box scores and stumbled upon the stock tables in our local newspaper (The Baltimore Sun used to combine the sports and business sections into one section). I asked my dad to explain what they were (stock tables look pretty foreign to a 12 year old) and after learning that one could make money from companies without actually working for them, I was intrigued. I have always been interested in business, good with numbers, and very competitive, so the markets really were a good fit for my interests and skill set.

I started investing my own money (what little amounts I had) throughout high school, and I went on to college knowing I wanted to study finance and ultimately become a research analyst or portfolio manager. I graduated college in 2002 when the dot com bubble burst and pretty much no investment firms were hiring.  So I worked in Corporate America for a couple years but was not happy doing anything outside of the markets. As a single twenty-something, I figured it would be an ideal time in my life to take a risk, quit my job, and start my own investment advisory firm. After all, there were a lot of people who got burned in the market in the early 2000’s and were looking for a change in direction. Most brokers and mutual funds had steered their clients into very risky, overvalued stocks and paid the price dearly. There was an opening for me to come in and suggest a different approach.

“What’s it like being a RIA managing your own clients versus your prior experiences? The good and the bad?”

I think I have really thrived as my own boss. I am very opinionated on the things that I am passionate about (investing strategies included).  So being able to craft my own business model and execute it without having to worry about how my bosses or my employer felt about those ideas has really been advantageous. Things like refusing to accept sales commissions for selling specific products, for example, is not always something one can do if they work for a big firm. However, I think clients should be invested in the best option for them, not just the ones salespeople can make a good living on.

I can’t say there is really anything bad about running my own firm. You are always faced with a situation where you have to be motivated every day because you are the face of the company and your efforts determine how successful the firm is.  However, as long as one is passionate and excited about what they do, I don’t think the need to take charge and put in the time and work is really a drawback, at least for me.

“How has it been for you managing other peoples money during this financial crisis? We’ve certainly seen historical levels of volatility in the last year, both up and down. Also, do you invest differently now because of this past year?”

Whenever the stock market fares poorly, trying to control clients’ emotions are always the trickiest job and of utmost importance. The biggest mistake people can make is to let their emotional overcome the realities and to make decisions based on how they feel versus what is the right move financially. I really try to educate along the way and always be in constant communication with my clients, helping them try to understand what is going on, what they should be doing, and what they should not be doing.

I write a quarterly letter that gets sent to clients every three months which serves as my main communication/education tool. Most of my clients were not really in danger of making irrational decisions based solely on negative emotions, but there are always a few people who get really anxious and want to sell everything at the exact low point when fear is highest. It’s completely understandable (human nature takes over), but it my job to try my best to educate, communicate, and facilitated good decision making, even in times of crisis and maximum emotion.

In terms of investing differently after the crisis, many people insist that every crisis should result in making changes to one’s strategy.  However, I respectively disagree provided that you had an appropriate game plan before the crisis. Each of my clients has a personalized investment strategy based on their own financial goals and risk tolerances. As long as those goals/risk profiles are unchanged, I have not changed anything with respect to their strategy. After all, if their investment portfolio was appropriate for them before the crisis, their financial plan should not have been severely impacted by the market drop. Conversely, if things have changed for the client personally, we will make necessary changes to their plan together.  For the most part, that has not been the case however. Change simply for change’s sake makes little sense to me.

“So you’re a value investor, looking for stocks in which the longer term fundamentals appear to be more optimistic than the near term market sentiment. Can you elaborate on your strategy a bit? How do you evaluate the companies? What are some of the factors you primarily focus on?”

Simply put, I believe Wall Street is too short term oriented. A focus on quarterly results, analyst upgrades/downgrades, and other short term events move stock prices dramatically, but the changes to the longer term outlooks for most firms, in my view, is never quite as dramatic as the market’s initial reaction appears to indicate.

My primary focus is on valuation. We know that stock prices have priced in the consensus view on the future prospects for a particular company, so I simply try and find situations where current expectations for a company appear to be more negative than I think they actually will prove to be over the long term. Essentially I try and take advantage of irrational short term moves in stocks and hold them for the long term, which allows the short term concerns to be proven either wrong or less significant than feared.

Let me give you a recent example. Last week CVS Caremark announced that it lost a few big contracts in its pharmacy services business. The stock dropped 25% (from 36 to 27) on November 5th alone. I like the long term fundamentals for the company, as both the drug store industry (CVS) and the PBM industry (Caremark) should benefit from an aging baby boomer population and expanded healthcare for all Americans. In my view Wall Street clearly overreacted by selling the stock down 25%. If you look at the overall financial impact of the contract losses, it’s about 5% of the company’s profits, so the stock dropped 5 times as much as it should have based on the numbers. That’s potentially a terrific opportunity.

“Lastly, I imagine there are many investors following you today with the inspiration to follow your footsteps. What advice would you give them? How can they start?”

The number one thing I would suggest is to study the markets, read a lot of books and academic studies that discuss the long term trends that allow investors to outperform the major indexes, and to use that information to formulate their own investment strategy. It is very important to form a strategy that has a high probability of performing well over a long period of time (based on historical data) and committing to it. Not only will doing so stack the odds in your favor, but it will allow you to articulate exactly what you do to potential investors. If people understand what you are doing, why you are doing it, and it actually works, there is a great chance you will be a successful investor.

Hope you enjoyed  his insight and can apply to your investment career development.  Thanks Chad!