Lee Freeman-Shor on how best investors make money despite being wrong

Shor believes successful investors have the skill to be wrong most of the time and still make money as their performance is largely dictated by what they do after they buy a stock and how they deal with both losing and winning positions over time.

“The investment ideas of some of the greatest investors on the planet today are wrong most of the time, and yet they still make a lot of money. This is because of a few key habits of execution that they religiously stick to when they find themselves in either losing or winning situations,” he wrote in his book “The Art of Execution”.

Art of execution key to success

Shor analysed the investments of 45 investors between 2006 and 2013, each of whom he had entrusted with managing between $20 million and $150 million dollars with strict instructions that they were only allowed to invest in their 10 best ideas to make money. After analyzing 30,874 trades that these professionals made during the study period, he discovered that the successful ones all adopted the same habits of execution.

“If success in property is about “location, location, location,” I came to understand success in the stock market came down to “execution, execution, execution” of great ideas. Or, as attributed to the great inventor Thomas Edison, “Vision without execution is hallucination.”, he said.

Who is Lee Freeman-Shor?

Lee Freeman-Shor is a researcher, writer, and a famous investment manager with over 16 years investment experience. His fund management career saw him successfully design, create, develop, and manage an innovative fund range and team that generated millions in revenue annually and at its peak had over £1 billion in AUM.

Lee Freeman-Shor was born in Nottingham in 1974 and graduated from Nottingham

University with a Bachelor of Law degree. He started his career in 1999 as an independent investment consultant at Chiltern Financial Services Ltd and in 2001 he joined Alexander Hall Associates where he was the head of investments.

He has also written a renowned investment book “The Art of Execution”, where he examines the habits that set successful investors apart from others and explains how investors can all use these traits to increase their profits.

Concentrate your portfolio

According to Shor, investors fail to deliver the returns they could generate because they fail to back their winners and instead they tend to think there is safety in diversification, when in reality they are better off concentrating their portfolio.

According to Lee many investors believe diversified portfolios represent less risk than a concentrated portfolio of stocks.

“The reality, however, is that all you are doing is swapping one type of risk for another. You are exchanging company specific risk (idiosyncratic risk), which may be very low depending on the type of company you invest in, for market risk (systematic risk). Risk hasn’t been reduced, it has been transferred,” he said.

5 different investor tribes

In his book, Shor has categorized investors into 5 different “tribes” based on their behavior with respect to losing and profitable positions.

Rabbits– These type of investors when losing money, neither bought more shares nor sold their holdings. Once forming an initial perception, they were achingly slow to change their opinion of a stock.

Assassins-These type of investors sold losing investments that fell by a certain percentage or that declined by any amount and showed no signs of recovery after a certain period of time

Hunters– These type of investors invest a lesser amount at the outset and with a plan of buying significantly more shares if the price falls. They are also unafraid to sell if it becomes clear that they had made a mistake.

Connoisseur– These type of investors make high-conviction investments, hold onto them for a long time and take small profits along the way

Raider-These type of investors have a habit of taking profits too early rather than letting their winners run. They take profits as soon as it is practical to do so.

Which investor tribe should one strive to become?

According to Shor, investors deal with losses by being either “Rabbits,” “Assassins,” or “Hunters.” Meanwhile they deal with gains by either being a “Connoisseur” or a “Raider.”

Shor believes investors should strive to be either “Assassin” or “Hunter” when losing money on a position and “Connoisseur” when making money on a position and they should avoid being “Rabbit” or “Raider” at all costs.

What should investors do if they are losing money?

Shor says there are high chances that investors’ great idea will lose money so before they invest even a little bit into an investment idea, it is imperative to have a plan of action as to what they will do if they find themselves in a losing position.

According to Shor when in a losing position , the successful investors plan to become either Assassins or Hunters.

On the other hand the average investors that don’t have a plan and consequently turn into Rabbits.

Have a plan of action

According to Shor, if investors want to be successful, they have to “materially adapt” when they are losing money, which means either they need to cut their losses and take the hit before they have lost too much money or, they need to invest a lot more money into an idea.

Shor says before investors invest in an idea, they have to have a predefined plan of action that will govern their actions after the initial investment, and they have to have the discipline to stick to it.

“Not having a plan, or doing nothing (the Rabbits) or too little is a character trait of a loser. The problem with doing nothing is that it opens up the possibility of losing big. That is, you dig a hole so deep that you cannot get out of it,” he says.

What should investors do in winning positions

Shor says while being in a profitable position investors need to make high-conviction investments, hold onto them for a long time and take small profits along the way (Connoisseur).

They should avoid taking profits too early rather than letting their winners run (Raiders).

The Winners Checklist

Shor came up with a checklist which can help investors maximise their returns:

1. Invest in the best ideas-1-2 ideas can make most of the returns, too many positions create a risk of adding losers and dragging your performance down

2. Position size matters- Be ready to add to a position, so don’t take a full position from the start.

3. Be greedy when winning- Do not sell too early.

4. Act when losing – Either sell or add more, don’t stay put. Have a plan to adapt when facing challenges.

5. Only invest in liquid stocks so that you can take advantage of opportunities.

How to achieve investment success

According to Shor, the key to success is to adopt the habits of successful investors by taking action when in a losing, or a winning, situation.

“I have seen the enemy. It is made up of Rabbits and Raiders. If you spot someone from one of these tribes when you invest then know you might face an unhappy ending. Ensure you invest with the Hunters, the Assassins and the Connoisseurs. Over time, these tribes will look after you, keep you safe, and ensure you prosper,” he said.

(Disclaimer: This article is based on Lee Freeman-Shor’s book “The Art of Execution”)