It’s a darn good thing that Don Noone and Jim Vanasek get along. At present, they are a lonely twosome in a downtown office roughly the size of a batting cage. They talk to each other all day long, and occasionally wonder if they are both going slightly cuckoo.

The good news is that they are great pals, having met at Columbia while getting their MBAs, and that teaming up to run a hedge fund has created a pairing with considerable energy and originality.

VN Capital Management, founded by these two 30-somethings in June 2002, got off to a rocky start. In their first full calendar quarter, the fund lost over 13% of its value. However, the S &P 500 was down 24%; by comparison they looked pretty good.

Since then, they have prospered. For the second half of 2002 they posted a gross return of 3.2%, compared to a 17% drop in the S&P, and then earned a 58% gain in 2003 when the S&P was ahead 29%.

So far in this lackluster year, VN Capital is up 15% on a gross basis – quite an achievement. What are they doing right?

First, they have a size advantage. Though the fund has grown steadily, it still has assets of only $12.6 million. It’s far easier to rack up big wins when you’re running a relatively small amount of money.

However, they are also following a conceptually attractive model. They buy just a few small stocks that receive little Wall Street coverage, but that have compelling valuations. They look for companies that have been tainted by some industry-wide black cloud, but still have positive fundamentals. In essence, they buy low and sell high.

Doesn’t everybody? It’s obvious that everyone’s goal is to do just that, but not all investors operate with convincing price discipline. VN looks for situations where the stock appears to be selling at a 25% to 30% discount to fair value, based mostly on an analysis of cash flow, assets and a determination of “core earning power.”

If this sounds familiar, it is. The model used by VN bears more than a passing resemblance to the Graham & Dodd value model of investing, which hap pens to be strenuously encouraged by the faculty at Columbia, Benjamin Graham’s alma mater.

It is also a model dear to the heart of Joe Reich, one of the founders of Reich & Tang. This notable money manager, a minority owner of VN Capital, has been a mentor to Messrs. Noone and Vanasek, and has helped them get started.

The real trick, of course, is to get the stocks right. Especially when a fund holds only ten stocks, as VN does today. Performance can be destroyed by any one of them turning sour.

Messrs. Noone and Vanasek look for ideas anywhere – conventional and unconventional sources. Their portfolio in no way mimics the S&P; that is not their objective. At the moment they own a tanker company, a sofa producer, a poultry producer in Mexico, recently were short an iron ore miner, and so on. No rhyme or reason – but valuations that fit their criteria.

The firm uses little leverage and has a heavy long bias. Indeed, Messrs. Doone and Vanasek were initially against short selling. However, running into a veritable cascade of falling stocks in their first quarter of operations made them think twice. They short with caution, however, all too aware of how easy it is to make a mistake.

They are also comfortable taking a breather, which they are doing right now. Citing high oil prices and rising interest rates, they are carrying an unusually large cash position of 25%, with which they are entirely comfortable.

That’s not to say that they don’t have some good ideas brewing. Recently, for instance, they added to their position in Methanex Corporation. This is the world’s largest producer of methanol, which is made from natural gas. As oil prices hit daily record prices, the expectation is that natural gas prices will also soar, shredding profits for anyone dependent on the material as feedstock.

Methanol production is also a business that on the surface has been upended by concerns about MBTE, a gasoline additive. This use of methanol (consuming approximately 20% of American production) is viewed as damaging to the environment. Several states have attempted to block its sale.

Sounds pretty grim, doesn’t it? However, Methanex is in excellent shape to weather these adversities. First, it is bringing on a huge new production facility in Trinidad, where it has secured a long-term natural gas supply contract from the government at quite low prices.

Second, other markets for methanol are doing quite well, benefiting from the economic recovery. Worldwide growth in demand for glues and resins made from methanol has boosted revenues, and recently allowed the company to raise the dividend 33%.

VN Capital started buying Methanex (a Canadian company traded on the NASDAQ under the symbol MEOH) last year at a little over $10 per share. Today the company sells at roughly $15, and accounts for about 13% of the fund’s portfolio.

What are they looking at now? Without giving away too many secrets, they are exploring other areas that investors and the media have given up on, where there might be hidden values.

An example, might be the baking industry, which has fallen flat because of the low-carb diet craze. Surely this sector will respond to declining appetites for doughnuts and Twinkies by coming up with better, lower-carb doughnuts and Twinkies (though the thought makes one shudder.)

Or, what industry has suffered worse press than the tobacco producers? There might be an opportunity in that sector, perhaps amongst suppliers, or distributors. Or what about looking for a short-sale candidate in the much ballyhooed gaming stock universe?

There are risks, of course, in a concentrated portfolio of thinly traded stocks. Mr. Vanasek would be the first to agree that VN should not be anyone’s sole investment vehicle. However, he would also argue that their attention to valuation, and bias towards companies paying solid dividends bolsters their emphasis on capital preservation.

It must be fun sitting around challenging conventional wisdom. Messrs. Vanasek and Doone appear to be enjoying the chase. They are also racking up some pretty terrific returns, which will no doubt attract more investors. That will be even more fun.