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Ram Kolluri was 22 years old when he first arrived at JFK International Airport one hot summer afternoon, clutching a single small suitcase and the one-way ticket that had just put more than 11,000 miles between him and everyone he knew back home in Hyderabad, India. As a university graduate, he’d easily procured a professional visa, and he’d chosen the Big Apple as his new hometown because–he chuckles today at his youthful logic–”Well, gosh, it sure had looked like a cool place in the movies.” Now, here he was, standing alone in the bustling terminal, waiting for what came next. “I kept waiting for someone to stop me, or to ask me more questions, or for something else to happen, when it dawned on me that I was already through customs and inside the United States,” recalls Kolluri with a laugh. Welcome to America… but now what?

Kolluri found his first job by literally pounding the pavement, trudging up and down every street from First Avenue to Seventh Avenue between 34th and 57th Streets, heading into every decent-looking building to ask for work. Fluent in English and trained in accounting, he soon landed an interview with a CPA firm, but quickly realized that he had a rather odd problem for an aspiring accountant: He didn’t know the value of money–at least not in dollars and cents. When the interviewer asked him for his salary requirements, Kolluri responded with a blank look; when his new employers took him out for lunch, he simply held out a handful of bills and let the waitress take the proper amount. The dollars seemed like play money–as foreign as rupees or kroner to an American–and he didn’t know how much was a little, and how much was a lot. “I had no idea what anything was worth,” he says.

More than three decades later, as an advisor who manages more than $150 million in client assets, holds an MBA in finance from an American university, and is widely quoted in the financial press regarding his quantitative investment research, Kolluri today has no such problems. He clearly knows the value of American money: He’s conducted extensive research aimed at properly valuing equities, and served as a subadvisor of an international mutual fund for Navellier Funds. He’s also successfully founded a planning firm in Princeton, New Jersey, merged it with another, and split it off again when circumstances required. Still, in the face of the ever-changing markets and the still-evolving profession of financial planning, Kolluri, 54, is modest about how far he has come in his professional knowledge, and how far he has left to go. “If 20 years [in the planning industry] teaches you anything,” he says wryly, “it is one word: humility.”

Lessons Learned

One of the toughest lessons came only recently, when the financial markets took a nose-dive, and pulled Kolluri’s clients’ portfolios at least part of the way down with them. Prior to 2000, Kolluri had based his investment choices on quantitative information that included forward-looking earnings estimates put forth by Wall Street analysts. What he hadn’t counted on was the herd mentality of the analysts, and the level of inertia surrounding any change in analysts’ opinions. “These analysts are group thinkers: When the markets are euphoric, they’re euphoric, and they keep on projecting all these rosy earnings,” he says. “Now it’s the other way around: Now that the bust has occurred, they’re singing a chorus of blues, despite the fact that earnings are increasing.” In mid-2000, Kolluri took a hard look at his investment models, and by early 2001 had revamped all of his client’s portfolios with a more conservative bent. He removed the forward-looking earnings estimates from his calculations altogether, and now puts trailing 12-month earnings front and center instead. “It is a conservative way of doing things, but this is the client’s nest egg, not a stake of money to be taken to a betting parlor at a race course,” he says. “Risk has become a much more overriding factor in our minds these days.” To paraphrase Peter Bernstein, he says, prudent investors should build half their portfolios for “What if things go right?” and half their portfolios for “What if things go wrong?” Unfortunately, he’d previously been building them mostly with the expectation that things would go right–and they didn’t.

Kolluri says the prolonged bear market has made him a better advisor, but he admits that if he’d had to choose between “building character” and saving his clients’ money in the first place, he’d have gone easy on the character-building and let his clients keep their money–or at least swallowed the bitter medicine in smaller doses. “I wish that this bear market had not happened all at one time; I wish we had had reality checks off and on throughout the late ’90s,” he says. “Five years of back-to-back performance really spoiled us all.”

Yet the bitter pills of the market downturn don’t seem to have inoculated everyone against future irrational exuberance. Indeed, some advisors–and many investors–seem to have already forgotten the hard lessons that the past three years have (or should have) taught them, says Kolluri. “ is trading at 100 times the price/earnings ratio, and there are pundits going around saying that this is justified, that this is a pure growth stock–just within three years,” he says. “It’s interesting how short memories are. We’re back to the same old story.”

While the past few years have taught Kolluri to keep a cool head in tumultuous markets, he says he’s also gained a deeper understanding of client psychology. “You can tell the client, ‘Hey, the market is down 33%, and you’re only down 30%,’ but that’s small solace, since the fact remains that he’s still down 30%,” he says. The real question for an advisor, he says, is whether that client can afford to be invested in a portfolio that can fall that far, that fast, in the first place. Relative performance is irrelevant if the client is no longer going to be able to reach her financial goals. “That’s why the correct investment policy setting and correct asset allocation are crucial,” he says.

Fortunately, Kolluri hasn’t had to learn all the lessons the hard way. Throughout the bull and bear markets, he has encouraged his clients to pay off their mortgages by the time they reach age 59, thus essentially investing in their own homes rather than in stocks, bonds, or mutual funds. As a result, many clients sailed through the tough markets happy as clams; with their homes paid off, they didn’t need to sweat the bear market’s every growl. Kolluri has also encouraged clients age 55 and over to build an emergency cash reserve equal to at least one year’s gross income, something they were more than happy to have on hand in the uncertainty of the past three years.

These days, Kolluri is casting his investment nets a bit more widely, looking for ways to combat the rising inflation he predicts for the future. “We think that the wonderful days of disinflation and low inflation are behind us, and the ship is slowly turning toward inflation,” he says. “I’m talking in terms of decades, not just next month or next year, but we believe that in the process the dollar will be subjected to weakness.” International bond funds are high on the list of investments he hopes will help him “inflation-proof” client portfolios; he’s also got his eye on inflation-protected securities, such as the Vanguard TIPS funds. And what about hedge funds? “We’ve looked at alternative investments, but there are too many fees, and too many complications, and many times the clients are gunshy–we just couldn’t make the mental leap,” he says. As for real estate, “we have entertained the idea and attended presentations, but it’s still not as clean as putting money into, say, an index fund of large-cap equities,” he says.

Coming to America

But how did the young immigrant puzzling over a handful of dollar bills at a restaurant end up managing more than $150 million? After a year at the CPA firm that first hired him upon his arrival in the U.S., he moved to the corporate comptroller’s office at CBS Television, not least because the TV giant was willing to pay his way in the MBA program at New York’s Pace University. There he started pondering the idea of personal financial planning. “When I was working there [at CBS], I used to ask myself, ‘Corporations do all this strategic planning. How would we do the same thing for individuals?’” recalls Kolluri. “I asked my professors, who were mostly from Wall Street, and they said, ‘Well, financial planning for individuals basically means selling them more insurance.’ The phrase financial planning really hadn’t come into vogue at the time.”

Still, Kolluri remained intrigued by the idea, and when Merrill Lynch offered him the opportunity to work in a private-client investment program, he jumped at the chance. “It was something like a current-day wrap program, where you solicit business from private clients and then introduce them to money managers,” he says. “I thought it would be a good way for a young rookie to get started in the field, and the downside was very limited because you’ve got professional advice and help at your disposal.” The shoe fit: Kolluri enjoyed listening to the money managers explain their theories and strategies, and within two years, he had rounded up more than $10 million in client assets.

After moving to Princeton in 1982, he decided to establish his own independent financial planning firm, which he soon merged into a two-office partnership with planner David Bugen in Morristown, New Jersey. The partnership lasted 13 years, ending in 1997 when Bugen merged his office with another Morristown firm. The former partners remain close friends (and Kolluri says that he still often forgets and refers to Bugen as his business partner).

As he was launching his firm in the early ’80s, Kolluri got wind of the ground-breaking research of Roger Ibbotson and Roger Gibson, who were then touring the country giving seminars about the then-revolutionary idea of asset allocation. Fascinated, Kolluri started doing some of his own research, and became a vocal critic of “style drift” in mutual funds. “The funds would say, ‘We are large-cap, or small-cap, or mid-cap,’ but when you really pulled the wrapper apart, there was no cleanliness in the asset exposure: Large-cap funds would have small caps in there, and small-cap funds would have large caps and mid caps,” he says. “They were just throwing these labels around without really complying with them.” He applauded the work of Chicago-based fund research firm Morningstar when it arrived on the scene, and he began developing his own valuation models for U.S., European, and Asian equities. As a result of his work, Navellier Funds invited him to manage its international equity fund, which he did from 1998 to 2000. His quantitative research into equities is ongoing, and he manages money based on mathematical models that he’s continually refining.

The Kolluri Method

When selecting stocks for his client portfolios, Kolluri starts with the companies of the S&P 1500, screening them using long-term growth measures such as sales growth, earnings growth, and operating income growth. He’s not looking for “boom-and-bust growth, but long-term, steady growth,” he says. Once he’s winnowed the group down to about 300 stocks, he uses value screens to identify 25 to 50 stocks to place in the client’s portfolio. He provides small-company exposure through Russell 3000 exchange-traded funds.

He favors ETFs because of their low costs, but notes that the creation of new ETFs and indexes is creating some surprising problems. “All these index companies were getting a taste of additional revenues because of the licensing fees they were collecting from ETFs, and then all of a sudden they said, ‘Hey, why don’t I create more sources of income by creating new indexes?’” he says. A crop of new style indexes sprouted up, and in some cases, “managers are asked to track the indexes, and indexes are mimicking what managers do,” says Kolluri. “At some point, you’ve got to ask, ‘Which comes first, the cart or the horse?’”

As for bonds, he provides fixed-income exposure through mutual funds. “I don’t profess any particular expertise in fixed income,” he says; besides, “these days, in this low interest rate environment, it’s hard to generate alpha.”

Kolluri does not provide model portfolios, but he does treat all client portfolios the same in some respects. Regardless of employment status, all clients age 49 to 59 are considered “pre-retirees,” and all clients over 59 are considered retirees. In a typical pre-retiree portfolio, two-thirds of the money is invested in equities, while one-third is invested in bonds. Each year, Kolluri skews the mix a bit more toward fixed income, so that by the time the client reaches age 59, her portfolio is 50% bonds and 50% equities. “The portfolio moves a small percentage toward bonds each year,” he says. “We don’t wait until they reach age 59 to change the portfolio.”

As a first-generation immigrant who has made good in his adopted homeland, Kolluri knows the importance of adapting to changing surroundings and rethinking old beliefs. As he looks ahead to the future, he believes that those skills will be paramount to the survival and success of his firm, and indeed for the future of all financial planning firms. “Compared to accounting or medicine or engineering, which in some cases have hundreds of years of knowledge to build upon, this is a young industry, and we need to keep our eyes open to new learning,” he says. “It’s very easy to go around saying, ‘Historically, equities yielded 10%,’ but how do you know that history will repeat itself? We have to always ask ourselves, ‘What did we do right, and what did we do wrong, and how can we do things better next time?’”