5 August 2014 – The Aleph Blog

How to Start an Investment Advisory Business from a Nontraditional Background

Posted on 5 August 2014 by David Merkel

Another letter from a reader:

Hi,

I recently discovered your blog. I read that you have had quite a long history in the financial industry and you mentioned to be running your own asset management shop as well. I currently work as a software developer but I have had for a long time a strong passion for investing and lately I have combined both of the latter. During the last 2 years I have developed my own software for simulating all sorts of quantitative investment strategies mainly for myself but at times for clients too. However, currently I am in a situation where I would like to take my hobby and passion to the next step and start working in the financial industry as a programmer doing similar tasks as I have done now as a hobby. Would you happen to have any good advice how to move forward and where to start looking for this kind of a position?

Thanks in advance,

You have to make your expertise known. ?That can be through a blog, a newsletter (whether e-mail or paper), and must give people a taste of your expertise. ?Be aware that to gain reader interest, clever examples will suffice. ?To gain clients you will need a track record that shows the results of all decisions made ?over the non-discretionary accounts you advised.

Simulated results aren’t enough. ?You have to be able to show that you made actual money in real time. ?Once you can do that, make your expertise known, and then follow up with those who contact you.

Many clever investors have come from nontraditional backgrounds. ?I know more than a few. ?I will add only this: don’t quit your “day job” before you have a sense that your investment management firm will have traction.

Sincerely,

David

On Setting Up New Accounts

Posted on 5 August 2014 by David Merkel

Another great letter from a reader:

Hi David,

I enjoy your writing. I find myself of a similar mindset. I am an investment advisor running my clients individual accounts in a value fashion. I am currently have my clients invested in about 20 positions. My question is in regards to a new account….I have held off on buying the same positions in that new account unless any of the 20 positions still fall within my estimated “buy” range. Therefore, a new account opened today may sit in cash for some time until new ideas are found, or the 20 positions from the other accounts fall back to a buy range. How do you handle this? Do you use a model portfolio and all accounts consistently look alike?

Thank you and keep up the good work,

Dear Friend,

My value proposition is that clients get a clone of my accounts. ?I am my own biggest client; what I get, they get, less fees. ?I set them up to mirror my account within a week of receiving the assets.

The main reason I do it this way is that there is little rhyme and reason to target prices. ?I don’t have any target prices. ?Rather, I compare stocks against each other using a scoring system quarterly, and I sell companies that are relatively ?expensive and buy companies that are relatively cheap. ?Read my article Portfolio Rule Eight to understand this better. ?I realize few managers manage money this way, but I think it is a way that reflects how the markets really work. ?We should not compare individual stocks against cash, but compare stocks against each other. ?We should compare the stock market as a whole against cash, to analyze whether it is absolutely rich or cheap.

Sincerely,

David