Years back Marty Bergin (podcast episode #525) arranged for me to visit Stuart, Florida and spend a day at Dunn Capital. In one of those classic small-world stories Bergin had been my baseball coach when I was 16 in Northern Virginia outside Washington D.C. Today, he is the president and owner of Dunn Capital while Bill Dunn remains chairman emeritus.
Amazingly, their long time office is on a quiet street located off a waterway in the heart of Stuart, a quiet retirement community 30 miles from West Palm Beach. There is no grand entrance at Dunn Capital, so after you enter, your only recourse is to see if anyone is in. It feels more like an accountant’s office than a high-powered trading firm. In fact, the atmosphere is no atmosphere. Dunn is a shining example of why location, pretentious offices, and intense activity have little to do with long- term trading success.
There are not hundreds of employees at Dunn Capital because it doesn’t take armies to run the fund. Plus, not all employees are traders. One issue to deal with when running a fund is not necessarily trading, but accounting and regulatory concerns. No one at Dunn is tied to screens discretionarily trading. Trades are systematically entered only after an alarm goes off indicating a buy or sell signal.
Another reason Dunn Capital has less infrastructure is because they have a few relatively well-chosen clients. In fact, Bill Dunn was fond of saying, “If people want to invest with me, they know where to find me.” Dunn’s investors benefit from the fact there is no disconnect between their bottom line as a fund manager and the investor’s bottom line—to wit, trading profits.
Dunn Capital performance is different than many because they compound absolute returns. They leave their own money on the table by reinvesting in the fund. As a result, Dunn’s assets are not only made up of clients, but owners and employees too, all systematically reinvesting profits over a very long time.
By focusing on profits and incentive fees Dunn Capital makes money only when the fund (read: clients) makes money. They don’t charge a management fee. With no management fee, there is no incentive to constantly raise capital. The only incentive is to make money. If Dunn makes money, the firm gets a portion of the profits. Compounding, or reinvesting your profits, makes sense if you’re serious about making money, and Dunn is serious.
In the time I spent with Bill Dunn, Marty Bergin and other staff I was impressed with their matter-of-fact, no-BS attitude. In fact, the very first time I met Bill Dunn he was wearing khakis and a Hawaiian shirt, and made it clear while he looked out over the waterways of Florida, it was his reasoned way or the highway.
No Profit Targets
Dunn Capital doesn’t say, “We want 15 percent a year.” The market can’t be ordered to give a trader a steady 15 percent rate of return, but even if it could, is a steady 15 percent the right way in the first place? If you started with $1,000, what rate of return would you rather have over a period of three years: +15 percent, +15 percent, and +15 percent or the unpredictable –5 percent, +50 percent, and +20 percent? At the end of three years the first hypothetical investment opportunity would be worth $1,520 but the second investment would be worth $1,710. The second one would be a stream of returns representative of a Dunn type trading style.
You can’t dial in a return for a given year. There are no profit targets that work. Bill Dunn explained:
We only have two systems. The first system is the one I started with in 1974. The other system, we developed and launched in 1989. The major strategic elements of these two models—how and when to trade, how much to buy and sell—have never changed in almost 30 years. We expect change. None of the things that have happened in the development of new markets over the past 30 years strike us as making the marketplace different in any essential way. The markets are just the markets. I know that is unusual. I know in the past five years a lot of competitors have purposefully lowered the risk on their models i.e., they are deleveraging them or trying to mix them with other things to reduce the volatility. Of course, they have also reduced their returns.
He is addressing a critical issue: reducing risk to reduce volatility for nervous clients. The result is always lower absolute returns. If you remain fixated on volatility as an enemy, instead of seeing volatility as the source of profit, you will never get this.
Dunn Capital by definition is very good at using risk management–more commonly called money management, or as Van Tharp calls it, position sizing–to their advantage. In June 2002 Dunn returned 24.26 percent, then followed that with 14.84 percent for July. By that time he was up 37 percent for the same year in which buy-and-holders of the NASDAQ for this period were crushed. Dunn Capital finished 2002 up more than 50 percent. Their 2008 performance was huge again—a big up year when most of the world was collapsing.