Yesterday, it was announced on the website of Bloomberg and Valor Econômico that one of the main traders of the bank Goldman Sachs is leaving. This news caught the attention of the media, as the trader Joe Montesano was a professional who obtained annual income close to USD 75 million. So the question remained: why would a high-earning trader give up a fortune like that?
I will try to answer this question and, as far as possible, I will try to draw a parallel between Joe Montesano's trading and Value investing , if that is possible.
How did the trader work?
Joe Montesano managed to create a forecasting system that predicted with some statistical probability which company would be incorporated in American indices such as S&P500 and NYSE. With that, Joe anticipated the market, buying the stocks before they were incorporated into the index and, with that, earning some gain when later that same stock came to be part of the index. This phenomenon occurs because many investment funds have strict selection criteria and can only invest, for example, in companies considered Blue Chips, which are companies that are part of the index's theoretical portfolio. Therefore, Joe Montesano closely monitored the companies that were very close to being incorporated, performing some anticipatory movements based on an algorithm created by him and his team.
Could it be that, in Brazil, the trader's technique would have worked?
For this, I will use the Ibovespa index manual found on the B3 website. If we read the methodology for incorporating a company into the Ibovespa index , we will notice that there are a series of inclusion and exclusion criteria, specifying rules for assets to become eligible. Therefore, if Montesano were working here in Brazil, he would basically walk around with this B3 manual under his arm.
With the inclusion criteria given and stipulated, Joe would only need to monitor the statistical data of these companies outside the index to predict their incorporation.
Investigating whether this makes sense, I looked for a news item from September 2021 that said:
“The third and final preview of the Ibovespa confirms the entry of 7 new shares.”
Reading the articles, I discovered that the stocks that were entering the Ibovespa index at that time were Alpargatas and Banco Inter, among others.
In a second moment, I verified the behavior of the prices of the stocks in question during the period that preceded their merger and found that these companies suffered considerable appreciation. Therefore, if Montesano had been able to predict these movements with some degree of accuracy, he would undoubtedly have done a great job for Goldman Sachs.
But what made the Top trader give up a millionaire salary?
My two hypotheses are: First: the market became aware of the tactics employed by the Montesano team and, as a result, it became increasingly difficult to carry out the task profitably. Second: Maybe he realized that if he used his knowledge in his own venture, he wouldn't need to share the profit with partners and third parties.
What is the parallel between trading and value investing?
In his mathematical model Joe used a system of profit forecasting , growth forecasting and trading volume forecasting. All of this data is pretty much the same as what value investors are looking to predict with some degree of accuracy. Therefore, although the two types of investors, trader and value investing, have different mental models, the database and objectives are often common to these two market players.
What's your opinion? Leave it in the comments.