A beautiful morning, here in Athens, yours truly, will share with you something personal … our story. In our late forties, we proudly achieved a long standing goal: to establish our own wealth management firm. As of late 2017 we are now running an independent multi-licenced portfolio management firm that is designed to offer services to high-net-worth clients. The timing couldn’t be worst: excessive regulation, excessive taxes and markets at all time highs.
In this newsletter you will have the chance to read our story, understand why we do what we do, see how we think about managing risk and discuss one or two things you may not know. So please rewind your clocks back in time and read below. I promise you will not get bored!
Does the picture beside remind you of something? It is Michael Douglas back in 1987, acting as Gordon Gekko, a legendary Wall Street player in the all-time classic film “Wall Street”. He is speaking on the phone with his broker (Bud) as he gives orders to buy and sell stocks.
The film was music to the ears of many young teenagers (us included) and presented in many ways a model for that generation. Of course life is not a movie and ironically the movie was released in December 1987 few months after the worst stock market crash (Oct 19, 1987); a reminder of how bad things can become.
I want to learn
So, having been sure that trading the financial markets will be our future profession all we had to do was to study it academically too. So we did; we received our Masters and MBA degrees and came out more confident than ever. It took us another 20 years to learn by experience a universal truth … that information is not knowledge.
In theory, theory and practice are the same, in practice they are not
A famous quote from Einstein this is. Well yes, it is true. I can
confirm along with many other practitioners, veterans or investors, that
trading the financial markets is very tough. For a starter it is the
emotions. When you make money you are a king, you feel the Gekko inside
you, sky is the limit of the things you can do. When you lose money, you
are a failure, your feel an idiot, you regret your actions.
In the epicenter of every decision you make (buy, sell or do nothing) there is the observer inside you that rewards or punishes. I am certain that everyone has felt the same emotional roller-coaster in everyday life decision. How do you feel in retrospect about your decision to buy a house, or to buy a business or sell a property? Well, in Wall Street you have this every day.
Being wiser by some decades of experience in the markets I can tell you that this is the single most important problem all investors face. It is no wonder why many traders are good philosophers, they meditate daily and they have learned that life is too short for misery and negativity.
In academic phraseology is it called:
Knowledge explorer, from the inside
In your thirties, along with experience and skill, your confidence increases and so does your capacity to compete for a good job. We did so in major financial institutions. And we did it in a power scale; collectively we have been employed by the very best financial institutions worldwide, as traders managing millions of assets, as risk managers or strategists advising large institutions and hedge funds, as senior relationship managers managing private wealth. The beautiful journey inside the financial institutions that took around 20 years gave us a unique perspective of how things work.
It was a journey of knowledge and experience one cannot forget. From the inside we had the unique opportunity to work with very bright and knowledgeable people and this is something that made us humble, not arrogant. On the negative side of things we understood many shortcomings from such large institutions.
Business partnerships and our “Skin in the Game”
As employee you enjoy a short convexity trade. That is you exchange time for your skill with a secure income that has a small probability of a large impact event (losing your job). In some sense you hide risk inside the workings of an institution that needs you. While there is nothing wrong with that, it was simply not a fit for us, our personality and our circumstances.
Instead what we wanted was skin in the game, participation in risk, pain on the downside and gain on the upside.
The contrast was more apparent in private banking. How can you ask a client to take risk if you take none? This is true for any advisor, service provider or out-sourcer. The question is simple, ‘what will you lose if I lose’?
Our partnership was quickly formed around these ideas as they grew through the years. It is the web of thoughts that you cultivate slowly as you interact with similar minds that share your truth.
Manos Karathanasis is one such person. He is one of the very few people that I know that shared these ideas in his own unique, bold and loud way! (I have lost count of the years we work together).
Nowadays our office is being formed with new partnerships; previous colleagues and more. There are people of high caliber and proven talent that makes us feel privileged to work with. I have no doubt that our relationship will prove to be of highest success.
When you have skin in the game you behave differentlyNassim Taleb
What client wants, what client needs
It is no secret that a financial advisor is like a physiologist: If you really need him, most probably you don’t want him.
One reason is overconfidence which many times is due to ignorance of associated risks. It is not really too difficult to be overconfident because of our education, business knowledge, wealth accumulation or simply self esteem.
But our minds are also playing beautiful games. In order to avoid facing reality of risks we choose not to look at them.
For example, we would prefer an illiquid investment (e.g. a property) versus a liquid one (e.g. portfolio of property stocks with better diversification) simply because the investment is not marked-to-market on a frequent basis.
We choose to ignore what is the single most important tool in our disposal: Risk. Note that risk can somewhat be controlled while returns cannot.
It is no wonder why professional managers manage portfolio risk while amateur investors focus on returns (please remember that when someone brags about his returns!).
In our view the real value we offer to our clients is sophisticated risk management (e.g. sizing, tail risk) instead of promissory notes of future returns.
We have named Unicorn one of our core products and it is our state of the art approach to managing a portfolio of investments.
But I will tell you a secret: