When you look into history, so-called derivative investment products that you think of as being recent, actually go back to 2400 BCE, in various forms. Call options go back to 600 BCE at least. In the 18th century BCE there were personal loans, as well as a liquid secondary market for these promissory notes. So what we think of as new inventions are actually very old.—Steve Foerster
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In This Episode, You'll Learn:
- Steve's journey to where he is today and how he ended up co-authoring a book with Professor Andrew Lo
- Some of the concepts from the legendary financial experts Steve spoke to for the book
- How closely linked the academic world of finance is
- About the some of the most important findings from investment research over the years
- About the early 20th-century mathematician, Louis Bachelier
- Harry Markowitz' story
- A summary of what the pioneers of investing would include in their perfect portfolio
- About William Sharpe and his now famous 'Sharpe Ratio'
The missing link was that correlations are critical as well. In fact, as we know, the more securities that you put into a portfolio, it's those correlations or that co-variant component that really dominates.—Steve Foerster
- How the phrase 'beta' came about
- How computers enabled researchers to access deeper insights into the world of investing
- About the debate between active and passive investing
- Whether volatility should be considered as a measure of risk
- About the progression of volatility data into today's investment models
- About the story of Eugene Farma
- How Steve views the question of 'what is the perfect portfolio?'
- Whether Steve considers Trend Following investing as, essentially, a perfect portfolio
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The insight that Sharpe picked up on was, 'what happens to a model if we add one more security, and this security was a risk-less security?' It turns out that this was the tangent that led to the optimal portfolio.—Steve Foerster