Building The Alhambra Team

So, now my client was happy with the portfolio I’d built for him. It met his criteria and the market had provided ETFs to implement the portfolio. I started Alhambra Investment Management in July of 2006. I recruited the original Fortress Portfolio client and a few others as the company’s initial clients. In the first few months of operation, the company had about $13 million in assets to manage. The staff consisted of me and an assistant. Our office was the patio around the pool at my house.

Over the course of that first year, I was able to recruit more clients and raise the assets under management to about $25 million. Frankly, I didn’t have ambitions for Alhambra beyond that. I liked dealing with a small number of clients and the fees were enough to provide a comfortable living.

Then came the summer of 2007 and the first break in what became the Great Financial Crisis of 2008. It was late July that year when the market finally started reacting to the sub-prime mortgage news that had been percolating beneath the surface since early in the year. My wife and I were in San Francisco for a short vacation that stretched into early August. I spent most of the trip in our hotel room tracking the market and desperately trying to figure what the heck was going on.

Alhambra’s client portfolios performed well during the first months of the crisis. The Fortress Portfolio was paying dividends. Stocks peaked in late 2007 but bonds and commodities were picking up the slack just as they were supposed to. Commodities especially were roaring higher in early 2008; Alhambra’s portfolios were up while most everyone else’s equity-centric portfolios were down. I had made some tactical changes but mostly this was just the asset allocation working as it was designed to do.

By the fall of 2008 though, our portfolios were getting hurt too. By the end of October, commodities were down almost 50% from their mid-year peak. The 10-year Treasury was basically flat on the year and stocks were down 34%. I didn’t have a formal system for rebalancing – other than just the standard once-a-year in January – and I didn’t have a macro-economic tactical plan in place. I followed the economy but like most people, by the time I figured out it was in trouble, it was too late. I didn’t know whether I should be doing something and if so, what it might be. To be blunt and truthful – with myself, our clients and you – I didn’t know what to do.

The 4th quarter of 2008, the most intense part of the crisis, was gut-wrenching – literally. For most of those three months, I slept little and started most days over a garbage can. The portfolios were swinging wildly during market hours and I spent after-hours doing my best to keep clients calm. It got to the point where I dreaded seeing Hank Paulson’s face because I knew it meant more bad news or another change to the rapidly multiplying bailout programs, the implications of which were impossible to divine. We had a term for situations like this in the Navy but it isn’t one I can use in polite company.

The Alhambra portfolios still did better than most in 2008 but the losses were, to me, completely unexpected and unacceptable. I had come through the 2000 bear market almost unscathed by avoiding technology stocks. The recession that accompanied that bear market was mild and there were plenty of ways to avoid the worst and still make money. But 2008 was different. The losses in the moderate allocation – down about 17.5% for the year and more at the nadir – were much larger than I anticipated based on the history of the strategy.

I was able to find my footing in 2009; Alhambra and its clients had survived. But survival wasn’t good enough. The Fortress Portfolio and the ad hoc tactical changes I had made in 2008 were not sufficient. While clients were very supportive and appreciative of the results – especially after they had a chance to talk to their friends – I personally felt the approach was a failure.

I have spent the time since then working to improve the Fortress and developing the disciplined tactical tools that make it the Alhambra Portfolio. We have made significant progress and now have a process that rivals the best available. And the most important part of that last sentence is the use of we rather than I.

It was obvious to me that if Alhambra was to serve its clients the best it could, it could not be a one-man operation. I knew there were others out there who had done better during the crisis and I wanted to learn how and why. I had an advantage in looking for those advisers who performed well during the crisis.

Near the height of the crisis I wrote an article – In Times Of Crisis, Trust Capitalism – that was published at RealClearMarkets by my friend John Tamny. John was the editor there and also worked for Forbes online. The article went viral and over the next few days, I received hundreds of emails. It taught me a valuable lesson about today’s shrinking world. Even a small company like Alhambra could have a big impact. It was over those few days that I decided to expand Alhambra.

Soon after, John asked me to join the team at RCM as an editor and I agreed. My section of the site was and still is the Off The Street section. It concentrates on providing a platform for independent voices, advisers, and bloggers who tell it like it is. We put the word out and pretty soon I was flooded with submissions, many of them from RIAs like myself. I’ve met a lot of really great advisers and analysts in my time at RCM.

One adviser in particular, stood out – Jeff Snider. Jeff’s articles touched on subjects that no one else even broached. It was obvious he had a much better understanding of the global financial plumbing than I did or anyone else I knew for that matter. Most of Jeff’s clients had actually made money in 2008; he was definitely someone I wanted to talk to.

Soon after I launched Alhambra’s expansion plan, I talked Jeff into joining me. The goal was to combine Alhambra’s strategic vision, embodied in the Fortress Portfolio, with Jeff’s macro-economic and financial market observations. A strategic plan implemented and managed with unique tactical tools.

The team has grown over time and is now a diverse group of individuals, each with unique skills and experiences. The task for the group has been to refine and improve the process we use to manage portfolios at Alhambra. The project started with a reassessment of the Fortress itself and then moved on to the development of our tactical approach.

The Great Financial Crisis of 2008 was a seminal event for me and Alhambra. The scars of that year, and the course of the markets and economy since, spawned a search for understanding and solutions to the age old problem of investing in an uncertain world. The original Fortress Portfolio is changed only slightly in its current form. Our research into tactical methods, how and when to alter the portfolio based on market and economic conditions, has yielded a disciplined investment process. And the research continues today.