Book Review: The Art of Execution: How the world’s best investors get it wrong and still make millions, Lee Freeman-Shor
Introduction
A dear friend of mine, an idol/leader among his peers, a great mentor recommended this book and I would refer him, “A Great Guru of our time”, Kelvin Seetoh. At only age 25, he have inspired many lives and built up a portfolio size of over $500,000. A individual much to be respected by his, laser focus concentration, his way of hustling, his selflessness, his talent on researching and his second-level of thinking. I’ve so much to learn from this great individual.
This book mentioned the different type of investors, and explaining what makes the winner, winner and vice versa. It ultimately breaks down into the hidden habits of execution, which will be shared below.
Lee Freeman-Shor currently manages over $1bn in High Alpha and Multi-Asset strategies.
Key Takeaways
Thomas Edison, “Vision without execution is hallucination.”
- Rabbits
What did the rabbit did wrong? Often the rabbits dug tunnels that were so deep; they never saw the light of day again
Their thesis will be, “What I have invested, is not broken. The share price will turn around and I will still make a lot of money from here.” They were capable of constantly adjusting their mental story and time frame, so that the stock always looked attractive. They often dismissed the event of black swan (which negatively impacted their investment portfolio)
Killer: In love with their stock
Over/under react to find themselves losing money (Halo effect)
Killer: Anchor Away
Anchoring: Dropping our intellectual anchor and letting it sink deep into a view and being unwilling to accept new findings that suggest we are wrong and should haul it up and sail the hell out of there
Slow, Stubborn, Surprise = Losing money
Killer: Endowment Bias
You believe that the product/stock to be worth more than the price being offered.
Rabbit cannot bear the idea of crystallizing a loss. They are too aware of how much they had paid for those losing shares.
Killer: FOMO
They don’t want to be seen as the fool who stood on the side while his friends are making vast forunes
Killer: Ego
Don’t like to be wrong. They are more interested to be right than making money. They were never going to accept their views were wrong, the wrong version of Extremistan*. Not my fault, due to win (as of casino)
What the rabbits could have done differently?
- Always have a plan
- Sell or Buy more
Mohnish Pabrai, “In my own portfolios at Pabrai Funds, I adjust or this (getting the odds wrong) by simply placing bets at 10% of assets for each bet. It is suboptimal, but it takes care of the Bet 6 being superior to Bet 2 problem. Many times, the bottom 3-4 bets outperform the ones I felt the best about.”
Cutting your loser is difficult. Not least because selling out of a stock helps clear your head and enables you to assess a situation more objectively.
Buying slowly over time (Dollar-cost Averaging), with a reduced position size at the outset, ensure you have plenty of ammunition left to load up when a share finally capitulates
“What separates the winners from the losers? Winners make small mistakes, while losers make big mistakes?
- Assassins
“Rule No. 1 – Never Lose Money.
Rule No. 2 – Never forget rule No. 1”
The Assassin lived and breathed the above principle. They sell their losing positions; to as to preserve their capital they were ruthless, cold-hearted hitmen, pulling the trigger without emotion.
Assassin rules required them to put a stop-loss in place at the same time that they bought any share. If the stop-loss was triggered by a share price going down a certain amount, it automatically sold their entire stake. It can be 10%, 20% or 30%.
In the world of investments, there is no such thing as a safe bet. If you invest in a company and think that it is bulletproof, I urge you to have an action plan to decide what to do when things go wrong – things often do.
They live by this philosophy, “if it feels like a struggle, then you should get out.”
When selling out a losing position, you are making 2 decisions.
- It is no longer a good idea to have money tied up in that stock
- Your money would make a better return invested elsewhere (an opportunity-cost decision)
Realizing a loss is 10 times more painful than living with it merely on paper
Carl Icahn, “In life and business, there are 2 cardinal sins. The first is to act precipitously without thought and the second is to not act at all.”
Losers hang around with losers while winners hang around with winners.
3) Hunters
Hunters bought significantly more shares when they found themselves in losing situations. Rather than killing an underperforming investment and forgetting about it, they stalked their prey- watching it get steadily weaker and attacking limb by limb every time it stumbled. Then they sit back and wait for it to recover, selling it on a handsome profit
You acquire more and more assets at cheaper and cheaper prices.
Hunters realized that being a contrarian investor is dangerous because you are always going against the crowd
It was no use buying when the crowd showed no signs of changing its mind any time soon.
Doesn’t mean something is cheap, you should buy it
They grew unafraid to sell, it it became clear they really had made a mistake.
A bad contrarian investor can make for a very committed Rabbit.
Hunter requires patience and discipline. You have to expect a share price to go against you in the short run, and be prepared to make money from stocks that may never recapture the original price you paid for your first lot of shares.
Peter Lynch, “I’m accustomed to hanging around with a stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I’ve owned something.”
Hunter adopts the 3-bites-at-the-cherry approach, he initially invest 1/3 of the total amount he is willing to invest in the stock. If the price falls beyond a certain threshold, he invests another third. If they price falls yet further, he will deploy his final third of remaining capital in the stock
- Invest big – and focused
One could end up with 50% of their total assets invested in just 2 stocks. Position size can be more important than entry price.
As far as Soros is concerned, when you’re right on something, you can’t own enough
80/20 rule: 80% of the effects come from 20% of the causes. It helps explain why great investors can be wrong most of the time and still make money. A few big winners make a massive difference to the eventual outcome.
- Any success ultimately came down to just one thing: Execution.
The common thread that connects everyone successful is a matter of habit.
- Adapt when losing and remain faithful when winning
- Invest in a handful of your very best ideas. Having 1 or 2 big winners is essential for success – 80/20 rule (the Pareto principle)
Bruce Berkowitz, “Why not buy more of your best idea rather than your 60th idea?”
Mark Twain, “Put all your eggs in one basket and then watch closely that basket.”
I personally prefer hold 3-8 stocks. I’m very much against on putting all in one great idea, bad luck can happen.
- Position size matters
Invest a large amount of money in each idea, but not so much that one decision determines your fate. The process of adding money to a losing position, as firing another bullet. Not having all your capital tied up in one idea means you get multiple opportunities to achieve success.
Don’t invest in too many ideas and over-diversify.
- Run your winners
Give your investments the possibility of growing into ten baggers*
- When losing,
either add position or sell. You can turn a loser into a winner. Expect to find yourself in a losing situation, have a plan to materially adapt, and stick to it.
- Only invest in liquid stocks
Have the ability to know when and how to get out
World of Value Investing 