Allow me to share something personal with you – our story. In our late 40s, we proudly achieved a long standing goal; to establish our own wealth management firm. As of late 2017 we have been running an independent and regulated portfolio management firm that is designed to offer services to high-net-worth clients and institutions. The timing however couldn’t be worse; excessive regulation, steep taxes and markets being at all time highs were just a few of the challenges we were facing.
Brave or ignorant?
In this post you will have the chance to read our story, understand why we do what we do, learn our approach to managing risk as well as explore some topics you may not yet be familiar with. So please take a moment to rewind your clocks back in time and read below. I assure you, it will be an engaging and informative experience!
The role model
It was Michael Douglas who reprised the role of Gordon Gekko back in 1987, a legendary Wall Street player in the all-time classic film “Wall Street”. Ηe is often seen speaking on the phone with his broker Bud, as he gives orders to buy and sell stocks. The film inspired many young teenagers at the time, including us, and served as an icon for that generation in many ways.
The hard truth, however, is that life is not a movie. Ironically, “Wall Street” was released in December 1987, only a couple of months after the worst ever stock market crash, which occurred in October of the same year; a real reminder of how bad things can become.
Our drive to learn
Having been sure that trading the financial markets would be our future profession, all we had to do next was to begin studying it academically as well. So we did; we received our Masters and MBA degrees and came out more confident than ever. And yet, it took us another 20 years to learn by experience a universal truth: that sadly information is not knowledge.
“In theory, theory and practice are the same. In practice they are not.”
This famous quote by Albert Einstein rings true in many areas of life, including trading the financial markets. I can confirm along with many other practitioners, veterans or investors, that trading is an incredibly challenging task. One major obstacle you are faced with is managing your emotions. When you make money you feel like a king and the embodiment of Gordon Gekko himself; the sky’s the limit of all the things you can achieve. When you lose money however you feel like a failure, an idiot even, and naturally begin to regret your actions.
At the core of every decision you make, whether it’s to buy, sell, or do nothing, there is an internal observer that rewards or punishes you accordingly. We are confident that this emotional rollercoaster has been experienced by everyone at some point in their everyday life decisions. How do you feel in retrospect about your decision to sell a property, buy a house or a business? In the world of Wall Street, this is a daily reality.
With decades of experience in the markets we can confirm that managing your emotions is the single most important problem all investors face. It is no wonder why many traders are good philosophers; they meditate daily and have learned that life is too short to be consumed by misery and negativity.
In academic phraseology this is called “decision management under uncertainty”.
Exploring knowledge from the inside
During your 30s your confidence, experience and skills all begin to grow, allowing you to compete more effectively for high-quality job opportunities. That was the case for us as well, and we did so on a large scale. Collectively, we have been employed by some of the top financial institutions worldwide in various roles: as traders managing millions of assets, as risk managers and strategists advising large institutions and hedge funds and as senior relationship managers overseeing private wealth. This fascinating journey within the financial sector lasted almost 20 years, and it gave us a unique insight into how the industry operates.
It was a journey of knowledge and experience one cannot forget. We had the unique opportunity to work with very bright and knowledgeable people which made us humble rather than arrogant. On the downside, we also came to understand the various shortcomings of such large institutions.
Business partnerships and our “Skin in the Game”
As an employee you typically experience a short convexity payoff. This means that you exchange your time and skills for a steady income, while there is simultaneously a small chance of a negative event occurring that can impact you greatly, such as losing your job. In a sense, you hide the risk inside of the institution that employs you. While this can be a good option for some people, it was simply not the right fit for us given our personality and circumstances.
What we wanted instead was to have “skin in the game”, to participate in risk, to feel the pain on the downside and the gain on the upside.
This contrast is particularly apparent in private banking. How can you ask a client to take a risk if you are not willing to do so yourself? This applies to any advisor, service provider or other professionals. 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 like-minded individuals who share your truth.
Nowadays our office is growing steadily by welcoming highly skilled and qualified individuals; either through the formation of new partnerships or the return of previous colleagues. These are people of high caliber and with a proven track record of success, making it an honor to work alongside them. As a result, we have no doubt that our collaboration will lead to unparalleled success.
“When you have skin in the game you behave differently.”-Nassim Taleb
Clients: Wants vs Needs
It is no secret that a financial advisor is like a physiologist; if you really need him, you most likely don’t want him. One reason for this is overconfidence, which is often a result of ignorance towards associated risks. It is quite easy to become overconfident due to factors such as education, business knowledge, wealth accumulation or simply because of your self-esteem.
But our minds also play tricks on us. To avoid confronting the reality of risks, we often choose to ignore them. For instance, we tend to prefer an illiquid investment, such as a property, over a liquid one, such as a portfolio of property stocks which would have better diversification. This choice however isn’t a calculated one; we are driven to it simply because the investment is not marked-to-market on a frequent basis.
We choose to overlook what is the most crucial tool in our disposal: Risk. It is important to note that risk can be controlled to a certain extent, whereas returns cannot. As a result, it is no surprise that professional managers focus on managing portfolio risk while amateur investors focus on returns; a fact that is important to keep in mind the next time someone boasts about them.
In our view the real value we offer our clients is sophisticated risk management, rather than promissory notes of future returns.
We have named one of our core products “Unicorn”, which represents our state of the art approach to managing a portfolio of investments. But I will let you in on a secret:
There are no unicorns, and there is no magic crystal ball to make you feel comfortable that risks don’t exist. What we offer is a better way to manage them.
Kostas Metaxas and Manos Karathanassis