The Alhambra Story: Our Mission

As I built the Alhambra Investments team after the 2008 financial storm, I told each new team member that our mission is to serve those who received bad advice or no advice at all. Yet, my convictions actually predated that storm by many years. Surprisingly our mission began in a Sears store. To really understand both our mission and portfolio strategies you need to start there. And if that sounds a little crazy, my wife would agree with you.

In fact, questioning my sanity was her very reasonable reaction, when I told her I wanted to quit a well-paying engineering job to go to work at Dean Witter in 1991. Back then DW was owned by Sears, a business model that was sneeringly referred to in the industry as “stocks and socks”. But she had supported my decade of private investing, where I learned many lessons the hard way, and now she supported me again as I spent my first six months sitting in a booth at a Sears store selling mutual funds.

What Investors Need

I wasn’t very good at selling funds out of that booth, but that’s probably best since DW wasn’t very good at running them. I eventually landed at Oppenheimer & Co. and spent 10 years there before starting Alhambra in 2006. That decade was spent working largely with big institutional clients. However, my early experience at Dean Witter, talking to all those people in the department store, stuck with me— not for what I learned about investing, but rather for what I learned about investors and the kind of help they needed.

Back then Sears was still a good retailer and it was where America bought their washers and dryers, their lawnmowers, refrigerators, furniture and just about anything else you needed for your home. The shoppers there were not the ultra-rich, but they weren’t poor either. They needed investment advice then and those same people – who probably now do their shopping on Amazon or at Best Buy – need advice today. Too often they are getting hurt from a lack of good advice from Wall Street firms.

Wall Street burned everyone in the dot-com bubble, selling basically worthless securities to an unsuspecting public. And then, as if that wasn’t enough, they almost burned down the entire financial system in 2008. The people who got burned in 2000 and 2008, who were really hurt, were those people I met in the Sears store so many years ago. Many of them started asking why should they trust their hard earned dollars – and their future economic well-being – to Wall Street firms that failed so miserably at managing their own shareholders’ capital?


Whatever Works

It’s easy to call the 2008 crisis a 1,000-year storm and just keep doing business as usual. That’s certainly what most of Wall Street did. But I couldn’t just chalk 2008 up as some kind of one-off. Many Alhambra clients trust us with their life savings and we have to consider worst case scenarios. The financial crisis of 2008 showed us that worst case scenarios could be both really bad and very real. I felt pretty good about what I was doing before 2008 and my clients did better than a lot of people during the crisis. But I wasn’t satisfied.

I’ve dedicated all my time since then to finding ways to provide good investment advice to the people who really need it. “Whatever works” was my unofficial motto by 2009 and just as I did when developing the Fortress Portfolio I threw out all my preconceived notions about investing. As the team grew we began to work together to develop the set of rules, the tactics, we would use to run our portfolios. Money doesn’t come with an operating manual so we set out to write one. We knew a diversified, low-cost passive strategy can work as long as the investor can stick with it. That is not controversial; it is accepted knowledge. The Fortress was designed specifically to work in all the market environments I identified:

The tools we developed immediately after the crisis allow us to navigate through these various environments and emphasize the assets that perform best in each. That was our first tactical insight and with it, we developed the Alhambra Portfolio, a tactically managed version of the Fortress Portfolio. The Alhambra Portfolio is managed using the yield curve, credit spreads, momentum, valuation and the US dollar to subtly adjust the allocation as the market environment changes. We also leverage our fundamental analysis of the economy and markets.

So, what else works? The short answer is that there are really only two things that work consistently and over the long term: Value and Momentum.

Value investing works and especially when it is practiced in a concentrated portfolio. Many of the most famous investors of all time have been value investors who consistently purchased undervalued stocks and sold them for profits. Often, they ran concentrated portfolios of a relatively small number of the very best investments they could buy. As the saying goes you can’t beat the market if you own the market. So, we developed our Archer Portfolios that use quantitative ranking systems to construct a concentrated portfolio of the best candidates.

Momentum also works. Classes of investments often outperform for extended periods of time. This is a proven, well-researched phenomenon. So, we engineered our own trend-following system. Our Pathfinder Portfolio methodology identifies investments that are posting strong performance relative to other assets. Employing technical analysis based on price movements and other factors, we also developed optional risk-hedging systems for both our Archer and Pathfinder Portfolios.


Building Your Personal Fortress

Why did so many people lose so much in 2008? To answer that question we must first define some terms.

A Strategy, according to the Oxford English Dictionary is:

  • A plan of action designed to achieve a long-term or overall aim.

A Tactic is:

  • An action carefully planned to achieve a specific end.

They sound very similar and people confuse them all the time. They are related but they aren’t the same thing. Tactics are methods used to achieve shorter-term goals that help one accomplish an overall strategy. Strategy is fairly rigid, while tactics must be flexible and fit the situation. Strategy guides the entire endeavor while tactics concentrate on specific parts of the strategy.

So, why did so many people lose so much in 2000 and 2008? The answer is surprisingly simple. Most investors were burned in those two bear markets due to the lack of a good strategy. Or more likely, no strategy at all. If you examine investor brokerage statements – as we do regularly for potential clients – most investor portfolios are constructed haphazardly. They have a collection of investments that represent tactics but without the context of a strategic plan. Investors and their advisers concentrate intently on the trees but completely ignore the forest.

Our Fortress Portfolio is a strategy, a strategic asset allocation plan. Everyone, from a beginning investor to the most experienced, from small to ultra-wealthy, needs a strategy. The Fortress is a strategy that emphasizes consistency and low volatility so clients can stick with it when the market gets tough.

Our original moderate Fortress Allocation looks like this:

Our Alhambra Portfolio is the Fortress Portfolio with tactical changes. The strategy hasn’t changed – all the elements of the Fortress are there – but the economic environment and our navigation tools – yield curve, credit spreads, etc. – may dictate that different tactics be used.

Our Archer Portfolios (Dividend Growth, Earnings Revision, Value-Quality-Momentum models) are tactical adjustments of the equity portion of the portfolio.

Our Pathfinder Portfolio is a tactical change that guides the allocation toward assets that are exhibiting positive momentum.

Our tactically-adjusted Alhambra Portfolio might look like this:If you ask where the inspiration for our Fortress, Alhambra, Archer and Pathfinder Portfolios come from, there is more than one answer. Multiple members of our investment team have been inspired by their own individual contributions. For me, the financial crisis of 2008 played a big role. That crisis inspired me to put a team together, build our portfolio family, and create the modern version of Alhambra Investments. But perhaps my greatest source of inspiration around our mission to serve investors with smart advice came from sitting in a booth at Sears.

Joe Calhoun, CEO

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