Director of Subscriber Development Robert McGroarty interviewed Hedgeye CEO Keith McCullough on Tuesday, December 20 at 11am ET.
Keith and Robert discussed best practices for implementing the Hedgeye risk management process and shared perspective on the thought process behind building the Hedgeye risk management process for the last fifteen years.
BOTTOM LINE: This is must-see TV. Below is an excerpt transcribed from this entire 46-minute conversation.
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Keith McCullough: This is a profession where you can constantly evolve and learn. By the time I got to the buyside, I observed how the best analysts and portfolio managers at what was then Dawson-Samberg (and then Dawson-Giammalva and Dawson-Herman) got their name on the door. What got Tony Giammalva's name on the door? Then what got Russell Herman's name on the door?
These measuring and mapping processes were quite clear: Rates of change and quantitative signals embedded in models. Russell Herman would never execute on any idea I brought to him as an analyst unless it was confirmed by his signal. His signal is his and mine is mine. That's the point. It's been a long story. Into my quantitative signal, I've tried to incorporate the best that I've seen. This long journey has been a path of observing, learning what not to do, watching certain portfolio manager do better than others, analysts that are better than others.
At its core, the foundation of the Hedgeye process is rates of change. That came from being an analyst and developing the Pods, which is a framework for analyzing companies. It looks at the rate of change of company metrics.
- Pod 1 is the rate of change of revenue growth
- Pod 2 is the rate of change of cashflow growth or EBIT margins
So I was an analyst then became a portfolio manager. When I started to think about developing a Macro process in that seat, the Pods gave birth to the Quads. I adapted that framework to the rates of change of growth and inflation. We combine that with my quantitative signal and that's the process we've been building upon ever since.
It's hard to synthesize more than 20 years of work but there you have it.
Robert McGroarty: Exactly. To your point, you discussed this with David Salem, the importance of having a strong foundation. A lot of subscribers sign up and get dumped into 2022 and don't have a good grasp of the foundation. This is important.
McCullough: That conversation with David was one of the most amazing discussions I've ever had. I was humbled by that one. It was humbling to have a veteran of the game, who's literally managed billions of dollars, tell us on a live mic that Hedgeye was the "greatest productivity hack" he's found.
Foundationally, this is all about you and what you're about. Are you willing to put in the work? Are you willing to be honest with yourself? Are you willing to accept that sometimes you're going to be unacceptable? Because when you make mistakes, you'll lose money. If you don't have that at the core, hard work, accountability and honesty, you're going to have a tough time with this.
What's the alternative? You're lazy. You're a victim and calling others out when you're wrong. You don't have to improve your process because you'll be "right" eventually. There are so many ways not to be that when you see the alternative it amplifies our foundation. I don't think our process is for everybody but that's the same with life.