A Disciplined Approach to a Complicated Problem
Especially when your portfolio is anchored by a concentrated stock position, company equity, or legacy holdings.
We develop a personalized investment strategy that aligns with your unique needs and goals guided by proven principles and pay special attention to client’s concentrated stock positions- company stock, legacy holdings, or single tickers that have become too large.
Our Guiding Principles:
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Portfolio Perspective
Every holding is judged by its role in the whole, not in isolation
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Market Timing
Most investments should have entrance and exit strategies.
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Active/Passive Management
The right tool for the right market, not dogma
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Appropriate Diversification
Enough to protect you, not so much it costs you
Pretty straightforward, right?
We do the hard work for you.
The Portfolio Perspective
Assets should be evaluated in the context of their impact on the overall portfolio — not as standalone investments
The goal of the portfolio perspective is to measure, control, and efficiently allocate risk. Progress toward this goal is made by judging an investment not just by its own merit, but by its interrelationship with the rest of the portfolio.
"A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies." — Harry Markowitz (1959), Professor at UC San Diego, Recipient of the Nobel Prize in Economic Sciences
Additional Reading: Harry Markowitz on Portfolio Selection
What does this mean for you? Let's Talk ➚
Market Timing
Most investments should have entrance and exit strategies
We believe in being thoughtful and tactical when establishing or closing a position, and that most investments should have a defined exit strategy. We prefer technical analysis — reading trends in price over days, weeks, and months — over attempting to forecast major market shifts years or decades out. We believe fundamentals like GDP drive economies over the long run.
Whenever entering or exiting a position, we weigh charts like moving average convergence divergence (MACD), market profile, and point and figure before making a recommendation.
"Within limitations, the future can be foreseen. The present is always tending toward the future, and there are always in existing conditions signals of danger or encouragement for those who read with care." — Charles Dow, "the Father of Technical Analysis," co-founder and editor of The Wall Street Journal, who believed you could increase the accuracy of forecasts by understanding market psychology
What does this mean for you? Let's Talk ➚
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San Francisco has a high concentration of academics and practitioners with a rich history in technical analysis. The tight knit community gathers around Market Technician Association (MTA) meetings, Technical Securities Analysts Association of San Francisco (TSAA-SF), and the Graduate Certificate in Technical Market Analysis at Golden Gate Universityas coordinated by Wyckoff Method enthusiasts.
Active Management vs Passive Management
We believe in low-cost, consistent exposure to efficient markets — and in paying for active management in less efficient ones
Actively managing a portfolio versus indexing it to benchmarks at the lowest possible cost is a longstanding debate in investment management. Proponents of active management emphasize the ability to add value; proponents of indexing emphasize exposure to market indexes at the lowest cost possible. Our preferred approach sits in the middle — we incorporate the merits of both sides.
We pay close attention to the efficiency of the market or asset class under consideration. It makes sense to index highly efficient markets with low-cost solutions (ETFs), and to hire managers (mutual funds) in less efficient markets, such as small-company and emerging-market stocks.
Advisories who preach indexing will tell you that you can't afford active management. What's true: successful managers tend to have higher investment minimums, charge higher fees, and generally see decreasing returns to scale. It pays to be selective with active managers. UK-based Barclays does excellent work in manager research and selection, and we've modeled our process after theirs.
What does this mean for you? Let's Talk ➚
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Talk about smart money.
I had the pleasure of sitting down with one of its founders of arguably the most successful hedge funds in history. His career is evidence that it is possible for smart guys to outperform markets. He is a PhD mathematician returned an average 39% per year return, net of fees, over a 17 year period. Their consistency allows them to charge fees in excess of typical hedge fund fare of 2% of assets and 20% of the upside, rather, they command a whopping 5% of assets and 44% of the upside.
No, they are not open to new investors.
Appropriate Diversification
Over-diversify and you risk paying too much for index returns. Diversify too little, and you risk too much.
Ask five different investment professionals how many stocks are required for a diversified portfolio, and you'll likely get five different answers. No magic number exists, but studies have identified optimum ranges. The risks of being under-diversified can be justified by any number of Warren Buffett-isms — but the risk of being over-diversified is costly, and preventable.
Over-diversify, and your performance can end up looking like the index minus management fees. You pay a fund company 1%+ to manage a mutual fund, and the fund's performance charts like an ETF you could hold for 0.1%. Then you pay an additional layer of fees to the advisor who sold you the bundle, and to the bank or discount broker who pays their salary. Discount brokers and the "premier" or "private" divisions of commercial banks are serial offenders, almost without exception. We've analyzed mutual fund portfolios produced by these institutions and found a collection of over 3,000 stocks across the underlying holdings — chart the performance, and unsurprisingly, it looks exactly like the Wilshire 5000 minus management fees.
No magic number? Then what?
A 1970 study analyzing multiple time intervals from 1926 to 1965 found that 95% of the benefits of diversification among NYSE-traded stocks were achieved with a portfolio of 32 stocks.
A more recent study by the American Association of Individual Investors (AAII), covering all publicly traded equity securities between 1960 and 2001, found:
Holding 25 stocks reduces diversifiable risk by about 80%
Holding 100 stocks reduces diversifiable risk by about 90%
Holding 400 stocks reduces diversifiable risk by about 95%
From our experience, somewhere between 25 and 100 stocks, performance starts to track the index. A market with greater breadth (2,000+ names) can justify a portfolio of over 100 stocks. But as a rule, over-diversification is a sign of a lack of skill and confidence — and should be avoided.
Further Reading: Variabilities of Return on Common Stocks (1970) How Many Stocks Do You Need to be Diversified? (2004)
“If you are a know-something investor, able to understand business economics, and find 5 to 10 sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk.”
— Co-founder and editor of the Wall Street Journal, believed you could increase the accuracy of forecasts by understanding market psychology