Khrom

Investments Fund, L.P.

Fund Investment Objectives

John Templeton aptly said, "If you want to have a better performance than the crowd, you must do things differently from the crowd." That maxim is obvious but its implementation is difficult. Differentiation in the investment business is hard. This is readily apparent from the many sound-a-like fund letters disseminated every quarter (ours included). Though stark contrasts among funds are rare, differences do exist on a subtle level-subtleties that can compound to a large competitive edge over time..We at Khrom Capital give more than passing thought to our dissimilarities and whether they serve to help or hinder us in producing superior returns. Here are some distinctions that we note: We can go for months without a new investment and expect to only make a few per year. Our cash holding may be enormous at times when we cannot find anything smart to do (or at times when we are just not smart). When we do find exceptional investments, we take concentrated positions and make them count. We now focus on spending time underwriting investments half a decade out - we have conditioned ourselves to consider everything else a distraction and avoid it. We have structured our fund with a long-term lock-up that actually allows us to do all the above. We have an incentive against gathering assets that hamper returns. (We have a 6% hard hurdle before earning our incentive fee and collect no management fee.).From our observations, most other funds need to make more than a couple of investments per year. Holding a large cash balance is usually not an option nor desired. Concentration of investment positions is avoided. Behavior of looking at everything and investing in anything is encouraged (a lack of focus that we were guilty of in the past). The capital that makes up these funds usually has quarterly liquidity-an apparent dichotomy between all those claims of long-term thinking that overlays a short-term capital base (like oil and vinegar, eventually the two separate). Lastly, it is hard to avoid spending time on growing assets when the fee structure is 2% and 20%..Our differences increase the odds that we can excel at underwriting a certain niche better than the average market participant. We focus on analyzing causes that have effects more distant in time than the average fund cares to think about. Having to make only a few investments per year allows us greater reflection about each one. Having a minimal amount of things clamoring for our attention frees up the capacity needed to think in a more absorbed and sustained way-a prerequisite for trying to grasp what your investment return in a business would be if you could never sell it. All funds have access to the same breadth of information, but we have more time for depth..We avoid looking at almost anything that promises results in the short term. That field is too competitive. The average holding period of a stock is now 150 days. It takes practice and commitment to say "no" in a world of infinite distractions. But we know the more distracted we are-the more shallow our thoughts-the less likely we can uncover a business that is not obviously exceptional now but will be in half a decade. Focus itself is an edge..Businesses with undiscovered potential for the extraordinary do not come around often. Our industry employs many intelligent people to search for them-so long as that potential is set to be revealed in the next month, quarter, or year. Determining what will happen soon is a crowded trade. That is why we condition ourselves against instant gratification. In an experiment where American eighth graders were offered a dollar now or two dollars in a week, this simple gauge of self-control correlated with their grades better than their IQ. Many in our industry are smart, but they are incentivized and habituated to take that dollar. We would rather have two. Patient behavior remains an edge beyond eighth grade..Having worked to decrease the pressures for short-term performance, we can discard daily trivia and only pursue the knowledge needed to underwrite long-term events. To recognize a particular pattern sooner than others, we must spend more time studying that pattern compared with others. Compounding knowledge of a particular pattern increases one's edge..Small differences eventually add up to a large divergence. We do not need to be great at underwriting every event the stock market offers. We need a spot-a niche-where we think we are set up to do better than the average participant in that game. Just as importantly, that edge should be sustainable and ever increasing. We cannot promise you that we will continue to produce above average returns on your capital, but we think our subtle differences give us an advantaged shot.