654 Advisors, LLC (654) is a Pennsylvania limited-liability corporation offering investment-management services to individual and institutional investors. Our primary goal is to provide clients with institutional sophistication at a reasonable priceTM. The firm is headquartered in Jenkintown, Pennsylvania.
Our Service Philosophy
Our mission is to meet the needs of investors who we believe our industry can serve more effectively by integrating the best aspects of the retail and institutional financial-services worlds and avoiding the worst. As an independent investment advisor, 654 is able to provide individuals and small institutions with sophisticated investment services without being subject to draconian account minimums, product requirements, commission-generation pressures, or investment constraints. As a young emerging boutique, we are firmly committed to putting the financial well being of our clients first and foremost.
Our Investment Philosophy
We believe well-functioning markets are reasonably efficient in that they will continually seek a state of equilibrium over time. Markets composed of a large-enough number of diverse agents should provide the most accurate assessment of a security’s or a market index’s present value, based upon current economic and industry conditions, firm-specific business strategies and execution capacities, and current and expected financial-market conditions. This belief provides the underpinning for basic, long-term investment strategies that allocate funds across broad asset classes in a way that is appropriate to an individual investor’s circumstances. These strategies are often referred to as passive or index investing.
Although we believe in the relative efficiency of markets, we also believe that, because human existence unfolds across physical time, efficiency is a process, not a state. Thus, markets spend most of their time in equilibria-seeking processes, but a true state of equilibrium is rarely, if ever, attained. The divergence between current market states and theoretical equilibria can vary quite a bit and persist for some time. Periods of wide divergence can reflect high levels of uncertainty or unusually high or depressed levels of risk tolerance, and both of those states can create attractive investment opportunities. This belief provides the underpinning for both tactical and opportunistic styles of active investing —
bets on the future outperformance or underperformance of specific asset classes or securities. The suitability of an active-investment strategy is determined entirely by an investor’s objectives and circumstances, while the possibilities for an active investment strategy’s success are determined by the skill, capacity, and commitment of the investment manager.
Among active-investment strategies, we believe contrarian approaches provide the best opportunity for long-term success. By acquiring assets for which present demand seems low relative to future demand, and by selling assets for which present demand seems likely to exceed future demand, an investor can take advantage of especially high or low risk premiums. This is the classic
margin of safety approach espoused by Graham & Dodd and some of their well-known successors.
Of course, contrarian investment approaches involve the risk of the market taking its sweet time coming around to one’s point of view, if ever. The strength of prevailing market trends has been borne out by the research of Benoit Mandelbrot and others, who have discovered that price trends can persist for a longer time than random walk models would predict. We also believe the rise of quantitative, data-driven trading strategies in recent decades has further cemented the prevalence of security-price momentum. Thus, even though the prevalence of price momentum tends to ensure ongoing opportunities for contrarian investors to acquire (or sell) assets at prices estimated to be a fraction (or excessive to) their underlying values, success will not be realized until enough other market participants have come around to share their views. In the meantime, the prices of those assets and securities might just tick downward or flat-line indefinitely, unnoticed by the rest of the market. This can be discouraging and costly in terms of missed opportunities. We seek to manage this risk through diversification, hedging, timing, and information set.
Diversification is a well-known tenet of investing and can be implemented in many ways. The stock, bond, and money-market portfolio mix is perhaps the most fundamental example. Within an asset class, geographical or sector and industry diversification can be used to dampen portfolio volatility. While statistical regression of historical data plays an important role here, we believe that such analyses must be applied with extreme care, as the relationships they analyze may vary significantly over time and in different contexts of political economy. We manage this risk by paying close attention to how historic relationships have unfolded over time and under different conditions, and how they are likely to develop given our theoretical understanding of economies and financial markets.
Hedging is another useful tool, and possibilities for hedging have expanded dramatically with continued innovations in financial markets. However, consideration of any hedge requires two fundamental acknowledgments. First, hedges are not free; effective management of risk typically requires a sacrifice of some degree of potential performance. Second, many investments do not lend themselves to effective hedging.
Timing is critical to long-term investment success in our view. This is a claim that the stalwarts of our industry have long considered heretical, so it deserves some clarification. The relationship between a security’s price and its perceived value may fluctuate widely over any period of time. The return that an investor will realize is determined primarily by the future price obtained relative to the initial price paid. Thus, timing is clearly a critical determinant of performance. We do not mean it in the sense of trying to divine the market’s future direction from moment to moment. Rather, by adhering to our valuation and trading disciplines, we seek to ensure that the timing of sales and purchases is supportive of expected performance. For example, to qualify for purchase, a portfolio security should be trading at a percentage of its expected future price that minimizes opportunity cost relative to a prevailing money-market or similar rate. Unfortunately, when it comes to crafting investment policies or implementing a client’s portfolio strategy, our industry has not always paid sufficient attention to the simple-yet-critical economic dictum that timing matters. It’s an oversight that has accrued to the benefit of trading desks and the detriment of clients’ investment performance.
We also believe the information set — and the insights which are applied to it — are crucial to an investment firm’s long-term performance. Our preferred information set and insights are discussed in the description of our investment process below.
Our Investment Process
There are two key areas in our investment process — allocation and selection. When a client hires us to provide personal financial analysis or manage a comprehensive strategic allocation, we employ a liability-driven and personality-focused approach that is more fully described in the ‘Our Services’ section below. When selecting securities for a client’s portfolio, our process is driven by both
In our bottom-up activities, we seek to identify assets that are trading at a significant discount to their intrinsic value. This is carried out through a two-step process. The first step primarily involves quantitative screening, although upon occasion attractive securities are identified through other means. Identification is then followed up by financial analysis, valuation, a buy, sell, or hold decision, and then appropriate portfolio weighting.
Our top-down analysis is driven by ongoing assessments of multiple factors that are believed to impact business cycles and economic performance. We believe government policies are key drivers of asset-class and security performance, especially in the areas of fiscal and monetary policy. We are also attentive to other factors that can have a significant impact. For example, things like institutional configurations or demographic internals appear to have had notable effects on production possibilities, standards of living, and asset prices over time.
While we subscribe to the idea that markets strive for efficiency over time, it is clear to us that they are also subject to various structural and even intellectual inefficiencies. We attempt to take advantage of these whenever possible. We also look at certain technical and administrative information that can add value to the investment process, such as trends in trading volume and shifts in ownership.
654 Advisors offers the following services and investment strategies:
- Personal Financial Analysis
- Strategic Allocation
- Special Opps Strategy
Our Personal Financial Analysis is based on the concept of liability-driven investing, which involves taking inventory of a client’s current and future needs, comparing them to current and expected financial resources, and integrating them with well-grounded capital-markets expectations. Our Personal Financial Analysis provides you with a comprehensive analysis of assets, liabilities, and net worth, along with a personality assessment, that allows us to design a long-term financial strategy personally customized to your needs and desires. The fee for this service is a flat $250 which is waived if you hire us to manage at least $50,000 of your assets. In complex cases, we may negotiate an hourly fee with you beforehand. Our Personal Financial Analysis produces a discounted balance sheet with an estimate of your net worth that is based on current and future assets, earnings, liabilities, and contingencies. From this, we help you identify financial risks that should be addressed and design an appropriate investment strategy tailored to your situation and personal makeup.
The Strategic Allocation is a carefully designed long-term asset allocation invested primarily in fixed-income securities and exchange-traded funds that replicate various financial-market indices in proportions that 654 believes will provide efficient diversification. (In some cases, individual securities will play a more significant role.) The underlying allocations are tailored to each client’s objectives and tolerance for risk, and may include allocations to cash or cash equivalents. The fee for our Strategic Allocation is an annual percentage of assets under management annually, charged quarterly. (Please see our firm’s Form ADV 2 for current fee calculations.) 654 strongly recommends that a client engage us for Personal Financial Analysis, as this will allow us to determine the asset allocation that is most appropriate for their situation. We will consider implementing a Strategic Allocation based on the recommendations of a third party working on a client’s behalf, or designing one for clients who do not want or need comprehensive investment analysis, but are not under any obligation to do so.
The Special Opps strategy is primarily focused on long-term capital appreciation through the identification and exploitation of opportunities across a broad universe of equity, debt, and derivative securities, including over-the-counter (OTC) and foreign securities and publicly traded partnerships that we believe are compellingly valued. The portfolio will be held in a separately managed account, and may invest a portion of assets in cash or cash-equivalent investments. The manager may employ tactics designed to lower risk (volatility), but the Special Opps strategy is inherently risky and poses a significant risk of capital loss. Investors must determine the appropriate amount of their assets to invest in this strategy, based on their personal objectives and circumstances.
The Special Opps strategy is available to investors as a single mandate, but 654 reserves the right to refuse or terminate any agreement where it feels the strategy is inappropriate for a particular client. The fee for our Special Opps strategy is an annual percentage of assets under management, charged quarterly. (Please see our firm’s Form ADV 2 for current fee calculations.) For billing purposes, the Special Opps strategy is considered to be held outside of a client’s Strategic Allocation in order to avoid overlap of advisory fees.
654 does not impose a strict account minimum for either strategy. However, 654 may refuse to enter into or may choose to terminate an Agreement where it believes the account size is too low to justify the anticipated management fee. 654 may negotiate or waive the minimum account fee in some cases.
Because the Strategic Allocation is tailored to each client, we do not maintain a performance composite for it.
Performance information for the Special Opps Strategy is available upon request.