We are pleased to bring you this exclusive interview with Paul Malcolm, portfolio manager of Wilshire Capital Allocation.
Wilshire Capital Allocation is an investment advisory firm founded in 2011. Wilshire seeks to achieve high risk-adjusted absolute returns through the systematic allocation of capital according to a rules-based system.
MOI Global: Please tell us about your background and the genesis of your firm. What motivated you to set up Wilshire Capital Allocation?
Paul Malcolm: I first became interested in investing during my college years around 2004. I was trying to learn everything I could about the stock market and I began subscribing to an investment newsletter. I made a handful of small investments in my $500 Scottrade account based on recommendations from the newsletter. None of the investments ever really worked out. Eventually, I came across value investing, and I felt like this is something I could do.
The market went down in August 2007, and at the time I believed this represented a great buying opportunity. Little did I know the market was giving a warning sign of much deeper problems on the horizon. This would have been a great time for me to actually do some research on the economy and assess what the risks were instead of loading up on ‘undervalued’ stocks.
I learned everything I could about value investing and in the summer of 2006, I felt I was educated enough to make some serious investments based on my own research. I had saved about $2,000 that summer working as a bell hop, and I also had an additional $5,000 my grandparents gave me when I turned 18. I was ready to make a big investment if the right stock came along.
I came across a drybulk shipping stock in The Wall Street Journal that piqued my interest. I did a little research into the industry and really liked what I found. The drybulk shippers purchased ships and would lease them out. Shipping rates were based on the current spot rate of the Baltic Dry Index. At the time the Baltic Dry Index had fallen from record highs to record lows in a short amount of time. I did some research and discovered that the shipping market was beginning to tighten and was likely to get tighter. Demand for drybulk commodities from China was likely to rise due to the Beijing Olympics and this demand was likely to far outpace the supply of ships in the markets. Due to the previous fall in the Baltic Dry Index, dry bulk shipping stocks had depressed earnings and were sporting low single digit P/E multiples. I quickly found two stocks I liked and went all in with my $7,000. The moment I purchased the stocks they bottomed and took off to the upside. I sold a year later with something like a 400% return. I was hooked.
I graduated from college in 2007 and took a job working for a few financial advisors at Smith Barney in Santa Barbara, California. The 2008 financial crisis hit and my account value took a big hit; however, I was able to learn a lot. I quickly realized that I had been far too brazen about macroeconomic risks than a prudent investment approach warranted. I also learned that the market, as a pricing mechanism, deserves a little more credit than I had been giving it. The market went down in August 2007, and at the time I believed this represented a great buying opportunity. Little did I know the market was giving a warning sign of much deeper problems on the horizon. This would have been a great time for me to actually do some research on the economy and assess what the risks were instead of loading up on “undervalued” stocks.
Come 2011 I was still working at Smith Barney and decided it was time for me to move on. In my mind I had two potential paths: get a job at a fund as an analyst or start my own fund. I came to the conclusion that I would pursue the latter path and, Lord willing, start managing money for other people. So began the process of formulating a rules-based system to manage a portfolio with low drawdowns and high returns. I felt pretty comfortable with my ability to identify undervalued stocks to generate high returns; however, I was not so comfortable with my ability to manage economic risks in order to reduce drawdowns in a portfolio. After a lot of researching and not knowing exactly what I would find, I developed what to my surprise was a pretty robust system for managing economic risks without sacrificing returns.
MOI: You define three categories of long equity positions. How would you characterize ideas in each category, and how much capital are you willing to allocate to each?
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