Being prepared to argue with markets (positions not paying off and adding to losers) and then receiving a big payoff in returns as the markets recognise the value, usually generates a lumpy pattern of return to value investors. Often a fund run by a deep value investor will have months of dull returns, then a spectacular phase of returns as the market comes into gear for their style. The downside of positions and the whole portfolio is typically limited by the value inherent, but the realisation of upside potential comes in discrete phases. Ahmet Okumus had few of these outcomes historically and ultimately defied the stereotypes completely through a rigorous investment process and learning lessons from his own experiences as a fund manager. The Hedge Fund Journal went to his offices on 3rd Avenue in New York to see how he applies those lessons now.
Extreme selectivity of stocks
Okumus Capital invests predominantly in US equities using a deep-value investing methodology. The stock selection discipline is rigorously applied in each fund. The core of the investment process is the identification of long (short) stocks that are trading at a large discount (premium) to fair value. The metrics used are ones you see in other firms - P/E, Free C/F multiples, EV/Sales and Price/Book. Stocks will only be bought when they can be acquired for around 40% discount to the internally-generated fair value. Stocks can be considered for shorting when they trade at twice the estimate of fair value and with broken fundamentals.