My guest today is Tim Koller, a partner in McKinsey’s Stamford, Connecticut office, where he leads a global team of corporate-finance expert consultants. Tim has served clients globally on corporate strategy and capital markets, mergers and acquisitions transactions, and strategic planning and resource allocation. For over 90 years, McKinsey & Company has helped corporations and organizations make substantial and lasting improvements in their performance. Through seven editions and 30 years, Valuation: Measuring and Managing the Value of Companies, has served as the definitive reference for finance professionals, including investment bankers, financial analysts, CFOs and corporate managers, venture capitalists, and students and instructors in all areas of finance.
The topic is his book Valuation: Measuring and Managing the Value of Companies.
In this episode of Trend Following Radio we discuss:
Recession and Recovery
The first half of 2020
Valuation: Measuring and Managing the Value of Companies 1st Edition
I can’t remember how I stumbled onto you podcast several years ago, but it was one of the best things I have done for understanding investing and life.
Your recent Podcast #599 – where you play an excerpt from your new book was just unbelievably fantastic. It really put together the concepts of my favorite book “The Little Book of Behavioral Finance” by James Montier of GMO into a short 30 minute capsule. (By the way James Montier would be a great guest if you could get him).
Thanks to your podcast, I can listen for 30 minutes every week to remind myself of all the behavioral biases working for and against successful trading.
Thank you very much for all your hard work.
I didn’t realize I was trend following (since I haven’t finished your book I am not 100% sure yet, but it looks like it). I didn’t even realize trend following was a thing. It was quite a nice surprise, when by accident, I came across your book on the shelves. I have avoided all books and web pages (other than scanners) on investing and trading. My theory has been that the industry was a quagmire of bullshit (based on my background of Scientific communications and hence the need for proof and explanations). However, I had been stopping in at bookstores randomly, in the hopes that my theory was wrong. So far, with your book, there may be some hope.
The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale. In Elliott’s model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it. The patterns link to form five and three-wave structures which themselves underlie self-similar wave structures of increasing size or higher degree. Note the lowermost of the three idealized cycles. In the first small five-wave sequence, waves 1, 3 and 5 are motive, while waves 2 and 4 are corrective. This signals that the movement of the wave one degree higher is upward. It also signals the start of the first small three-wave corrective sequence. After the initial five waves up and three waves down, the sequence begins again and the self-similar fractal geometry begins to unfold according to the five and three-wave structure which it underlies one degree higher. The completed motive pattern includes 89 waves, followed by a completed corrective pattern of 55 waves. Each degree of a pattern in a financial market has a name. Practitioners use symbols for each wave to indicate both function and degree—numbers for motive waves, letters for corrective waves (shown in the highest of the three idealized series of wave structures or degrees). Degrees are relative; they are defined by form, not by absolute size or duration. Waves of the same degree may be of very different size and/or duration. The classification of a wave at any particular degree can vary, though practitioners generally agree on the standard order of degrees (approximate durations given):
-Grand supercycle: multi-century
-Supercycle: multi-decade (about 40–70 years)
-Cycle: one year to several years (or even several decades under an Elliott Extension)
-Primary: a few months to a couple of years
-Intermediate: weeks to months
Elliott Wave prose is almost as good as Scientology: Definitely No PhD Required.
“We provide further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). Our results bolster Black’s intuition that prices tend to be off roughly by a factor of 2, and take years to equilibrate. The story behind these results fits well with the existence of two types of behaviour in financial markets: “chartists”, who act as trend followers, and “fundamentalists”, who set in when the price is clearly out of line. Mean-reversion is a self-correcting mechanism, tempering (albeit only weakly) the exuberance of financial markets.”
An excerpt from Larry Swedroe’s new piece about trend following:
[Trend following] performance was remarkably consistent over an extended time horizon, one that included the Great Depression, multiple recessions and expansions, multiple wars, stagflation, the global financial crisis of 2008, and periods of rising and falling interest rates.
[Trend following] annualized gross returns were 18.0% over the full period, with net returns (after fees) of 11.0%, higher than the return for equities but with approximately half the volatility (an annual standard deviation of 9.7%).
[Trend following] net returns were positive in every decade, with the lowest net return, at 4.1%, coming in the period beginning in 1919.
There was virtually no correlation to either stocks or bonds. Thus, the strategy provides a strong diversification benefit. After considering all costs and the 2/20 hedge fund fee, the Sharpe ratio was 0.76. Thus, even if future returns are not as strong, the diversification benefits would justify an allocation to the strategy.
My guest today is Robert Carver. He got his start in finance working at trend following firm AHL in 2001 during his final year of college. He was introduced to quantitative trading while at AHL and for the first time began thinking of finance in a systematic way. He later went back to AHL, working there from 2006-2013. It took a lot of research and digging for Robert to decipher which financial tools available to traders were appropriate for him. He knew he was not the only trader with this problem so he decided to write a book laying out what he had found through his research. Robert gives actionable tips and guidelines for others who may need help finding what trading instruments are right for them. Robert also wanted “Smart Portfolios” to be a book for the average investor. He wrote it in a way that is not over complicated. Any trader, new or professional, can pick it up and find it useful.
The topics are his books Systematic Trading: A unique new method for designing trading and investing systems and Smart Portfolios: A Practical Guide to Building and Maintaining Intelligent Investment Portfolios.
In this episode of Trend Following Radio we discuss:
Warren Buffett trading
Expected average performance
Leveraging a portfolio
Luck vs. Skill
“Most people probably spend much less time thinking about their portfolio’s than they do thinking about getting their car fixed.” – Robert Carver