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| MIKE SHELL |
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SPOTLIGHT
Programmed for Absolute Returns
Mike Shell utilizes his expertise and enthusiasm in a unique and disciplined approach to portfolio management. As a registered investment advisor, his firm, Shell Capital Management, LLC, serves as an investment management firm in a fiduciary capacity. The firm runs tactically managed, risk-controlled investment programs with an objective of absolute returns.
Shell Capital Management LLC isn’t a broker. Instead, the firm is a Knoxville-based institutional money manager. Shell Capital manages portfolios for an asset based fee, which is fully disclosed in the firms’ agreement. “I think it puts us on the same side of the table with our investors” said Shell. “When the portfolio grows, we get a pay raise. If it declines, we get a pay cut.”
Shell offers something different from your average money manager. He focuses on achieving positive results regardless of the market, a radical change from the typical, “buy and hope” approach to investing. As a portfolio manager, Shell uses an absolute return strategy, seeking a real rate of return. Most firms measure their success against a predetermined benchmark.
“Unlike some managers, we manage the risk of the market rather than accept it. And we buy only when we believe the odds are overwhelmingly in our favor” said Shell. “We don’t benchmark an index and we don’t blame the market for our results. Instead, we’re actively looking for low risk profits. Because we’ve actively managed our risk allowing us to avoid market corrections and got more aggressive when the market is supporting higher prices we’ve naturally beat the popular indexes.” The reason some portfolio mangers don’t beat the market may be because they cut their winners short and let their losses run. “Risk control is at the core of all we do,” said Shell. “To enter a position in the market we must open ourselves up to some risk. But risk is only dangerous if you don’t understand it. Brain surgery is risky, but the brain surgeon is well trained to understand and manage the risk. We don’t hide from risk. We determine our risk and control it.”
Some portfolio managers may rely on broad diversification thinking by spreading their money thin they are managing risk. Yet, when the market corrects so do they. Shell’s sophisticated money management system instead monitors their amount of open risk in each position and across the portfolio from the point of entry through the exit.
“Our risk is determined by our position sizing algorithms and the price we’ll exit if the stock becomes a loser,” said Shell. “That has nothing at all to do with someone’s perception about how risky a stock is or how much of it we hold
and everything to do with how much risk we’ve predetermined
that we’ll take in it.”
Shell’s risk management system is made up of two parts. The first part controls how much risk they have in each position and in the portfolio.
“This part of our system tells us each day how much of our account value we’ll lose if all our exits are hit,” said Shell. “That is what risk really is; how much we’ll lose if this position doesn’t work out.”
The second part of the risk management system determines offense vs. defense.
“When the market is rising, we focus on the areas with the strongest price strength. When the market begins a down trend, we raise cash quickly by taking profits or cutting losses.” said Shell. “Like football, there is a time to run offensive plays in attempt to score some points and a time to run defense to keep the other side from scoring against you.”
But, that doesn’t mean Shell is a market-timer.
“We are a trend-following firm, meaning that we have programs that identify trends and capitalize on those trends until they change,” said Shell.
Many other firms believe they can determine a stock’s “fair value” and time their buys based on that. But Shell simply ranks stocks based on price strength and stays with them until the positive price action stops.
The basis for Shell determining what to buy is relative strength, which also has a parallel to the pigskin. “Relative strength works much like the college teams in the NCAA football rankings. As a team rises to the ranks of the top 20, it is highlighted as a top performer. In the same way, stocks that are eligible for Shell’s portfolio are the best performing stocks in the market. In the same way college football teams rank changes based on how well they are doing at the current time, Shell’s relative strength program sorts through stocks to determine the true leaders and the strong stocks that look to potentially continue that trend.
Most of us in East Tennessee want the top ranked team to be the Tennessee Vols, but this is where money management differs from college football. Whether you root for Tennessee or Florida, you’re probably going to remain loyal to your team through thick and thin. However, remaining too loyal with your stocks may trap you in the losing column.” Thus, an important aspect of Shell’s system is determining leaders and laggards based on actual price performance.
“It is human nature to think one can control the outcome of a position by controlling the entry,” said Shell. “Most advertising you see about trading or investing is about a supposedly highly reliable entry method such as buying something because it’s down as if that means it will go back up. That may turn out to be a big loser because a trend in motion tends to remain in motion. I know that I simply need to buy the true leaders in the market and I believe tomorrow’s leaders are the leaders today. A trend is more likely to continue than to reverse and when it does reverse, then we do too. If we keep our money in the top ranked stocks we’ll likely close the year with some of the biggest winners.”
But relative strength isn’t the only filter for identifying strength. Shell believes there are some other criteria that tend to make those short term trends become long term. “When the market is supporting higher prices we focus on companies with proven and consistent sales and earnings growth, solid profitability and new products and services in the early stage of a new price trend,” said Shell.
Shell didn’t figure all these things out himself; he has trained extensively with two of the worlds greatest traders profiled in Market Wizards: Interviews with Top Traders by Jack D. Schwager. He also spent several years on a quest to develop a portfolio management system that allows him to make systematic decisions. He developed a system modeled for decision-making that is based on the wisdom and skill he’s gained from years of application.
“Make no mistake about it, I’ve spent a good part of my life, including weekends and nights, working towards excellence in the process of portfolio management,” said Shell. “I have every intention to be at the top of my game. That started with becoming a craftsman at charting years ago and today I know exactly how I create my results and it isn’t just picking stocks.”
Shell Capital has attracted independent financial advisors and planners around the country to hire the firm to manage their clients’ accounts. As an institutional investment manager, Shell offers a separate account program whereby the firm manages the accounts of the planners’ clients. “Our managed account program for advisors is unlike anything the industry has ever seen”. “We not only offer an absolute return style that is very rare, but we provide unmatched support for the advisor-client relationship such as conference calls, webcasts, and useful commentary that is not based on academic theory. “ said Shell. “Unlike most programs, these calls are with me not just my representatives. Our program gives planners a tremendous edge in an industry full of mediocrity. “
“Today, I operate a complete portfolio management system that answers every day the critical questions we face as a money manager,” said Shell. “The system helps me determine when to exit a loser to protect capital, when to exit a winner to take profits, and how much to buy or sell.”
Shell uses a tedious game plan. His systematic portfolio management process helps to eliminate emotion, bias and personal opinions from the process of investment management. Instead, the system is more like a manual tailored to meet investment objectives. The system is not unlike the play calling sheet football coaches use when they are deciding whether to go for 1 or 2 when they are trailing late in the game.
Also, you may have noticed Shell sometimes uses the word “trading” instead of “investing.” See, Shell believes the difference between the two words is important and often misunderstood.
“An investor is someone who invests money into something for a return,” said Shell. “For example, investors buy rental property, businesses where you get to put the net income in your pocket or a managed portfolio. If you are an investor in an auction market I think it’s useful to frame it as trading since you must enter a trade to get in and a trade to get out.”
For Shell, the problem lies in the fact that many people make the mistake of framing the word “trading” to mean short term and “investing” as long term.
“Look, I’m as long term as the market allows me to be,” said Shell. “I would love to buy that one stock that goes up every day forever and all I have to do is enjoy the profits. But that just isn’t going to happen in the real world.”
Shell gets really concerned when investors are told to invest in a stock for the long term. So, Shell is against much of the conventional financial education that he believes teaches people to be proud of making potential irreversible and costly mistakes such as holding a loser long term just for the sake of holding it long term.
“Personal psychology is what really creates our individual results,” said Shell. “Those who hold on to losers have a problem admitting they are wrong. Many investment managers have this problem and their losses can get really big.”
“Most firms are selling the same thing, cookie cutter models and pie charts,” said Shell. “What we offer investors is a managed account based on real returns. Most of our wealthy clients come to us for absolute returns regardless of what the market is doing. Some want to make big money but most prefer the consistency of a smooth equity curve.”
Famous commodities trader Ed Seykota once said, “Everyone gets what they want from the market.” And Mike Shell understands what Seykota meant. “Everyone gets what they want because if they aren’t wouldn’t they instead do something else? I decide my own results and you do too”. That’s why the odds of success with Shell are increased by the fact that he knows how he makes his results. “It’s the exit, not the entry, that determines whether or not we make or lose money,” said Shell. “We operate based on the Golden Rule of Trading: Cut losses short and let winners run. The real key to success is actively taking what you want from the market instead of what it gives you. In other words, we all get to create our results through our decisions. If your portfolio is down it isn’t the markets fault- you decided not to exit”.
So, the bottom line on Shell Capital is that Mike Shell understands that taking responsibility for creating his own results is the secret to meeting objectives in the markets.
Mike Shell is the Principal and Portfolio Manager for Shell Capital Management, LLC a Knoxville-based investment manager. The firm specializes in tactical, absolute return investment programs for institutional and private investors. For more information, he can be reached at (865) 539-9070.
Mike Shell
Portfolio Manager
Shell Capital Management, LLC
500 Ebenezer Rd
Knoxville TN 37923
(865) 539-9070
www.Shell-Capital.com |
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