Banks: We don’t like ‘em much, but can we emulate their business model?

  1. limits-message

I started Crystal Wealth in 1998 as an active believer in the power of equities to grow my investors’ money significantly over the long term. With the caveat that I didn’t believe in buy and hold but rather active market timing based on a proprietary quantitative trading system I had developed in 1995.

The “Crystal System” worked brilliantly from 1996 through the end of 2001 but then stock markets changed and my system stopped working so well. It took me a year or two to figure out I couldn’t stay ahead of the changes and consistently make my clients >20% a year anymore, but once I accepted that fact, I closed the original Crystal funds and returned the money to investors.

Brainwashed

“Now what?” I asked myself in 2004 with no clients, no faith in public equity markets and no desire to go work for someone else. I sat down and asked myself what it was that most clients need to achieve their financial goals.

The answer, in hindsight, seems ridiculously simple and clear, but at the time, it was anything but because I, like most other advisors, and unfortunately clients as well, was brainwashed into thinking we had to pursue the highest return we could and just stomach the downside volatility that accompanied that, because, of course, higher returns mean higher risk!

The Answer Is Simple

What most clients need is a consistent and high single digit rate of return with no downside volatility. In other words, if we could earn 7-8% a year consistently and not lose money in any year, most of us could achieve our savings and/or income needs. While the answer was simple, the method to achieve it seemed anything but.

Traditional investment know-how would dictate finding the right asset allocation between cash, fixed income (bonds) and equities (stocks) and then holding on for dear life and “knowing” that over a 5, 10, 30 year time horizon, things should work out okay. Yikes! There had to be a better way.

How Do Banks Do It?

I asked myself which industries achieve a solid and predictable growth rate year over year without losing money? Duh, banks and insurance companies! How do banks do it? They take our money in on deposit and pay us pretty much nothing in interest and then lend it out in the form of mortgages and loans and they earn the interest rate spread between what they’re charging borrowers and what they’re paying depositors.

Mirroring

I set about to emulate the banks for our clients and created our first alternative strategy mortgage fund in 2005. The success of that fund in generating significant income and growth for our investors led us to specialize in alternative strategy fixed income strategies and our current roster of debt-based investment funds focused on the mortgage, media, medical, commercial factoring and infrastructure industries provides our clients with a means of achieving their income and growth goals with zero downside volatility.

About the Author

Clayton Smith

Founder and CEO of Crystal Wealth, Clayton Smith, CAIA, is known for his hunger to provide a limitless lifestyle to those around him. Clayton embodies the three main elements to a fulfilling life and successful business: focus, integrity and discipline.

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