Portfolio Management

For a limited number of accredited investors, we offer discretionary portfolio management in an actively managed trading portfolio, utilizing strategies based primarily on technical analysis of price and volume augmented by various technical indicators.  The portfolio manager is Paul Krause.

A Trading Strategy rather than an Investment Strategy

What is the difference?  A trader understands that he is buying a stock at a specific price, with subsequent price action subject to supply and demand. Thinking like a trader, when Mr. Krause buys a stock for himself and his portfolio clients, he does so based on his analysis of price and volume, the application of various technical indicators, and relevant fundamentals. In a bull market, for example, he expects the stock to rise in the not too distant future.  If it does not rise as expected, or goes down instead, he will sell the stock and either park the proceeds in cash or purchase another stock.

An "investor" takes a different approach.  He feels he is investing in the company when he purchases stock.  He buys on the basis of company fundamentals as he understands them.  If the stock declines and he still likes the company, he may buy more because he feels he is now getting a bargain.  He can be willing to suffer through signifiant corrections in the company's stock price and the market overall as long as he continues to have a favorable opinion of the company's prospects.

Mr. Krause believes there is a place for both approaches for a high net worth investor, but  not in the same portfolio.  Hence, his requirement that a prospective portfolio client have ample funds in other portfolios with other managers with different strategies and objectives before investing in his managed portfolio.

Because he does not believe in the existence of one 'Holy Grail' portfolio management strategy that works in all types of markets, he uses diffferent strategies at different times in the portfolio in reaction to varying market environments such as bull, bear and sideways markets.  

Also, believing in the principle of diversification of investment strategies, he insists that the investment in this trading portfolio represent less than 20% of the investor's total investment assets.  Therefore, to qualify as a discretionary portfolio client, the investor must have a minimum of $2,000,000 in outside investments with other investment firms.

Can Mr. Krause describe the nuts and bolts of his portfolio management strategy in this website?

Not adequately on this website, but he does spend as much time as a prospective client desires explaining his portfolio strategy in detail prior to their opening an account, and at least one personal face-to-face meeting is also recommended.

Although it's not necessary for the client to be an expert when it comes to the intricacies of technical analysis of the stock market, he prefers his clients to have some understanding of and interest in the stock market.  In fact, a typical client has a high level of interest in the stock market, and may even manage a basket of stocks himself, but because of time constraints, allocates a portion of his total portfolio to outside managers and advisors.

How does Mr. Krause manage risk?

He manages risk by limiting the risk per trade.

The most carefully designed system in the world doesn't guarantee success in every trade.  Therefore, a critical component is the willingness to cut losses while they're relatively small.

An example: The 1.0% Rule

Let's suppose our objective on any trade is to limit the maximum portfolio damage on any individual trade to 1.0%.  This is not the size of the trade - it's the amount we put at risk, based on the distance from the entry price to our stop. Call that distance 'R' for risk.

In a $500,000 portfolio, limiting our risk to 1.0% of the portfolio value comes to $5,000.  Suppose we purchase a stock at $50 per share.  Whenever Mr. Krause makes a purchase, he always has a stop/loss exit price which is based on some technical support level, typically in the range of 4% or less below the purchase price.  In this example, let's suppose our exit stop is at $48, or 4% below the purchase price.

To determine the desired size of the position given a 1.0% risk objective, take the difference between the purchase price and the stop price, which in this case is $2, and divide that $2 into $5,000 to come up with a position size of 2500 shares.  These 2500 shares at $50 per share come to $125,000, or 25% of this portfolio. In other words, $125,000, or 25% of the portfolio has been invested in one stock, with a risk of 1%, or $5,000.

The above example is a fairly typical position size, as a fully invested portfolio will normally have 4 to 5 stocks, with no one purchase exceeding 25% of the portfolio.

Margin or short selling used?

As mentioned above, different market environments require different strategies.  For example, a long-only strategy could have difficulty in a bear market. For that reason, clients can authorize Mr. Krause to go short as well as long, and buy on margin.  However, it is not required if the client does not feel comfortable with margin and short selling.

What is the account minimum?

The minimum is $500,000.  However, a client can initially fund the account with a minimum of $100,000 for up to a one year trial period, which allows the client ample time to gain first-hand exposure to Mr. Krause's management of the account. During the trial period and anytime thereafter, the client can liquidate and close the account, but if the client desires to remain a portfolio client, he or she must fully fund the account up to the minimum of $500,000 by the one year anniversary date.

What is the fee?

The annual fee is 1.8% debited quarterly and is based solely on the value of the account at the beginning of the quarter, not on the level of trading activity. That is the only charge.  There are no transaction charges or commissions.

Does Mr. Krause have trading discretion?


How does this account differ from a fund?

The client portfolios are held in separate accounts as opposed to one fund.  Every client individually owns and can view his positions and activity online at any time.

How will the client know how the account is doing?

The client can receive confirms, monthly statements and performance reports by email or regular mail or both.  Performance is always reported net of fees.

Where are the assets held?

The account's assets will be held at Pershing, LLC.  Pershing has been a leading global provider of financial solutions for over 70 years.  In addition to SIPC protection, accounts held at Pershing have coverage in excess of SIPC's limits through Lloyds of London.  Pershing's parent company, the Bank of New York Mellon, has $27 trillion in assets under control or administration and $1.4 trillion under management.

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