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The Art of Execution: How the world's best investors get it wrong and still make millions, by Lee Freeman-Shor
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Over seven years, 45 of the world's top investors were given between $25m and $150m to invest by fund manager Lee Freeman-Shor. His instructions were simple. There was only one rule. They could only invest in their ten best ideas to make money.
It seemed like a foolproof plan to make a lot of money. What could possibly go wrong? These were some of the greatest minds at work in the markets today - from top European hedge fund managers to Wall Street legends.
But most of the investors' great ideas actually lost money. Shockingly, a toss of a coin would have been a better method of choosing whether or not to invest in a stock.
Nevertheless, despite being wrong most of the time, many of these investors still ended up making a lot of money.
How could they be wrong most of the time and still be profitable?
The answer lay in their hidden habits of execution, which until now have only been guessed at from the outside world.
This book lays bare those secret habits for the first time, explaining them with real-life data, case studies and stories taken from Freeman-Shor's unique position of managing these investors on a day-to-day basis.
A riveting read for investors of every level, this book shows you exactly what to do and what not to do when your big idea is losing or winning - and demonstrates conclusively why the most important thing about investing is always the art of execution.
- Sales Rank: #854966 in Books
- Published on: 2015-09-14
- Original language: English
- Number of items: 1
- Dimensions: 8.50" h x .47" w x 5.50" l, .73 pounds
- Binding: Paperback
- 208 pages
Review
"This book isn't really about investing, instead it's more of an exploration of human behaviour under different types of stress, and this is what makes the book fascinating...This book is written to appeal to all kinds of investors, and is bound to appeal to both the author's peers and to the inexperienced investor." - Owen Jones, Fidelity Personal Investing "I think that you make a very good point, which is that there are many styles to investing as there are ways to go through life, but the person who knows his character, and is knowing of his environment and his investment horse, is the one that wins over the long term, provided that he is asked to make defined decisions, which strip the investor of his natural inclination to hedge his bets." - Crispin Odey, hedge fund manager and founding partner of Odey Asset Management "I am often asked by graduate students what books I have read that I could recommend they read to make the students better investors. My answer generally is that the student should read the Intelligent Investor and the Reminiscences of a Stock Operator; I will now add your book to the short list for students to read...I wish I had read this book thirty years ago!" - Dennis M. Bryan, Partner at FPA and a legendary investor in the USA "As investors we all know that we should let the winners run and cut the losers. The question is how this works in practice in investment management. Freeman-Shor provides a comprehensive framework how to deal with losing positions and how to make winning positions have a big positive impact on your portfolio returns. A great read for investment novices and professionals alike." - Dirk Enderlein, partner and fund manager at Wellington "With a unique insight into the day to day behaviours of some of the world's best fund managers Lee Freeman-Shor draws out some invaluable lessons for both the private and professional investor and lays bare the behavioural pitfalls we are all subject to in executing our investment ideas" - James Inglis-Jones, fund manager at Liontrust "I truly enjoyed reading your book. Not often I read a book that has so many relevant real-life examples. I also enjoyed reading the quotes very appropriate. You summarize a winning strategy in a very concise manner while backing it up with both examples and data. It is a must read for all managers and allocators. I will order my copy right away and will send some to our clients." - Arik Ahitov, Managing Director and fund manager at FPA "I really enjoyed reading it, although I have to say it was in some respects a chastening experience as - in spite of best efforts - there are times when I lapse into some of the negative behaviours you identify. I think the insights are terrific though and it will serve as an 'internal voice of conscience' forcing me to scrutinise execution and timing more thoroughly" - Daniel Nickols, fund manager and Head of UK Small and Mid-Cap equities at Old Mutual Global Investors "An enjoyable and thought provoking read, from somebody with the real life evidence to back up the findings. An easy to read and enlightening study of behavioural finance, brought to life with real life experiences" - Kevin Lilley, Europe ex UK fund manager, Old Mutual global Investors "It is an interesting and easy read with useful insights for the private investor." - Jeremy Prescott, Private Investor
Review
"This book isn't really about investing, instead it's more of an exploration of human behaviour under different types of stress, and this is what makes the book fascinating...This book is written to appeal to all kinds of investors, and is bound to appeal to both the author's peers and to the inexperienced investor."
- Owen Jones, Fidelity Personal Investing
"I think that you make a very good point, which is that there are many styles to investing as there are ways to go through life, but the person who knows his character, and is knowing of his environment and his investment horse, is the one that wins over the long term, provided that he is asked to make defined decisions, which strip the investor of his natural inclination to hedge his bets."
- Crispin Odey, hedge fund manager and founding partner of Odey Asset Management
"I am often asked by graduate students what books I have read that I could recommend they read to make the students better investors. My answer generally is that the student should read the Intelligent Investor and the Reminiscences of a Stock Operator; I will now add your book to the short list for students to read...I wish I had read this book thirty years ago!"
- Dennis M. Bryan, Partner at FPA and a legendary investor in the USA
"As investors we all know that we should let the winners run and cut the losers. The question is how this works in practice in investment management. Freeman-Shor provides a comprehensive framework how to deal with losing positions and how to make winning positions have a big positive impact on your portfolio returns. A great read for investment novices and professionals alike."
- Dirk Enderlein, partner and fund manager at Wellington
"With a unique insight into the day to day behaviours of some of the world's best fund managers Lee Freeman-Shor draws out some invaluable lessons for both the private and professional investor and lays bare the behavioural pitfalls we are all subject to in executing our investment ideas"
- James Inglis-Jones, fund manager at Liontrust
"I truly enjoyed reading your book. Not often I read a book that has so many relevant real-life examples. I also enjoyed reading the quotes very appropriate. You summarize a winning strategy in a very concise manner while backing it up with both examples and data. It is a must read for all managers and allocators. I will order my copy right away and will send some to our clients."
- Arik Ahitov, Managing Director and fund manager at FPA
"I really enjoyed reading it, although I have to say it was in some respects a chastening experience as - in spite of best efforts - there are times when I lapse into some of the negative behaviours you identify. I think the insights are terrific though and it will serve as an 'internal voice of conscience' forcing me to scrutinise execution and timing more thoroughly"
- Daniel Nickols, fund manager and Head of UK Small and Mid-Cap equities at Old Mutual Global Investors
"An enjoyable and thought provoking read, from somebody with the real life evidence to back up the findings. An easy to read and enlightening study of behavioural finance, brought to life with real life experiences"
- Kevin Lilley, Europe ex UK fund manager, Old Mutual global Investors
"It is an interesting and easy read with useful insights for the private investor."
- Jeremy Prescott, Private Investor
About the Author
Lee Freeman-Shor currently manages over $1bn in High Alpha and Multi-Asset strategies. Lee was ranked as one of the world's top fund managers in Citywire 1000 in 2012. He has been AAA rated by Citywire, Gold rated by S&P Capital IQ fund research and is Bronze rated by MorningstarOBSR. He has been at Old Mutual Global Investors since October 2005 and was previously Co-Head of Equity Research. Prior to joining Old Mutual Global Investors Lee worked for Schroders, Winterthur and in private client wealth management and has over 16 years investment experience. Lee holds the Investment Management Certificate and has an LL.B (Hons) law degree From Nottingham Trent University. He currently lives in Maidenhead, England with his wife Michal and their son Adam. In his spare time he enjoys going to the movies and having fun with his family.
Most helpful customer reviews
14 of 14 people found the following review helpful.
Can save your bacon
By investingbythebooks
I’m a terrible snob when it comes to investment literature. Books written for private investors rarely interest me. This is different. This might be the most important book on investments that a private investor can read – if he can gather the discipline to follow the advice. It might actually save quite a few professional portfolio managers’ bacon as well.
Lee Freeman-Shor is the PM of Old Mutual’s Best Ideas Fund. The fund’s strategy is to select the 45 best investors they can find and let them invest in 10 stocks each. The aggregate of the underlying positions makes up the fund. The interesting thing from the perspective of the reader of this book is that this has given the author an unprecedented real time access to analyze and learn from the best during a long stretch of years. It turns out that less than half of the PMs’ positions were profitable. Some PMs lost money on as much as 2/3rds of their positions. And still, on average these elite investors generated good or even great overall investment results. How this could be is the content of this book. The short answer is so called money management.
The author first analyzed how the PMs acted when it came to their loosing positions, dividing them into three groups according to their behaviour. The Rabbits that didn’t handle loosing positions well and the Assassins and the Hunters who had two different profitable methods to turn losses around. Then Freeman-Lee looked to the opposite – how the PMs handle winning positions. They are now sorted into the unsuccessful Raiders and the top performing Connoisseurs. For each investor type the author analyzes their behavioural biases and discusses what could be learnt from what they are doing wrong and what they are doing right. A bit like The Little Book of Behavioural Investing by James Montier, but for the private investor and with a money management touch.
The thing with losses is that they become disproportionally harder to come back from the larger they get. If a stock goes down 25 percent it has to go up 33 percent to get even. If it goes down 50 percent it has to go up 100 percent and if it goes down 75 percent it has to go up 300 percent. The one thing you cannot do when experiencing losses is nothing. This is what the Rabbits did and they ended up in rabbit holes that were so deep that they couldn’t come back from the losses. Two things work – either you sell or you buy. The Assassins used stop-losses that gave them a fair amount of small losses but never the big ones that were impossible to turn around to profits. This is the typical trend following investor. The Hunters instead waited a little longer and then they doubled down by adding to the position. By doing this they lowered their average purchase price to something that was possible to make a profit from when the stock turned up again. This is the typical value investor.
The loosing habit in handling profits was taking profits too early. High returns are built “through preservation of capital and home runs” as Stanley Druckenmiller put it. A successful portfolio’s return is disproportionally created by a few very successful holdings. By selling as soon as a nice profit was at hand the Raiders effectively closed down their chance of home runs. Don’t.
This is a book written for private investors so it is very simple. Take away the case studies and use normal size font and it could be 70 pages. For its stated audience it is great. There is a fine balance in writing about a specialist area to the broader public. The good author writes for an intelligent person who doesn’t know much about the subject. The bad treats his readers like children. Freeman-Shor is in the good camp. I also like that he, in contrast to trading literature, gives a fuller range of money management options suited to both trend following investors and value investors.
The professional investor will not be surprised by anything in this book. Yet his performance could be vastly improved if he followed the advice. Simple but not easy.
18 of 24 people found the following review helpful.
Another Book Review From The Aleph Blog
By David Merkel
Some books are better in concept than they are in execution. Ironically, that is true of “The Art of Execution.”
The core idea of the book is that most great investors get more stocks wrong than they get right, but they make money because they let their winners run, and either cut their losses short or reinvest in their losers at much lower prices than their initial purchase price. From that, the author gets the idea that the buy and sell disciplines of the investors are the main key to their success.
I know this is a book review, and book reviews are not supposed to be about me. I include the next two paragraphs to explain why I think the author is wrong, at least in the eyes of most investment managers that I know.
From my practical experience as an investment manager, I can tell you that your strategy for buying and selling is a part of the investment process, but it is not the main one. Like the author, I also have hired managers to run a billion-plus dollars of money for a series of multiple manager funds. I did it for the pension division of mutual life insurer that no longer exists back in the 1990s. It was an interesting time in my career, and I never got the opportunity again. In the process, I interviewed a large number of the top long-only money managers in the US. Idea generation was the core concept for almost all of the managers. Many talked about their buy disciplines at length, but not as a concept separate from the hardest part of being a manager — finding the right assets to buy.
Sell disciplines received far less emphasis, and for most managers, were kind of an afterthought. If you have good ideas, selling assets is an easy thing — if your ideas aren’t good, it’s hard. But then you wouldn’t be getting a lot of assets to manage, so it wouldn’t matter much.
Much of the analysis of the author stems from the way he had managers run money for him — he asked them to invest on in their ten best ideas. That’s a concentrated portfolio indeed, and makes sense if you are almost certain in your analysis of the stocks that you invest in. As such, the book spends a lot of time on how the managers traded single ideas as separate from the management of the portfolio as a whole. As such, a number of examples that he brought out as bad management by one set of managers sound really bad, until you realize one thing: they were all part of a broader portfolio. As managers, they might not have made significant adjustments to a losing position because they were occupied with other more consequential positions that were doing better. After all, losses on a stock are capped at 100%, while gains are theoretically infinite. As a stock falls in price, if you don’t add to the position, the risk to the portfolio as a whole gets less and less.
Thus, as you read through the book, you get a collection of anecdotes to illustrate good and bad position and money management. Any one of these might sound bright or dumb, but they don’t mean a lot if the rest of the portfolio is doing something different.
This is a short book. The pages are small, and white space is liberally interspersed. If this had been a regular-sized book, with white space reduced, it might have taken up 80-90 pages. There’s not a lot here, and given the anecdotal nature of what was written, it is not much more than the author’s opinions. (There are three pages citing an academic paper, but they exist as an afterthought in a chapter on one class of investors. It has the unsurprising result that positions that managers weight heavily do better than those with lower weights.) As such, I don’t recommend the book, and I can’t think of a subset of people that could benefit from it, aside from managers that want to be employed by this guy, in order to butter him up.
Quibbles
The end of the book mentions liquidity as a positive factor in asset selection, but most research on the topic gives a premium return to illiquid stocks. Also, if the manager has concentrated positions in the stocks that he owns, his positions will prove to be less liquid than less concentrated positions in stocks with similar tradable float.
Summary / Who Would Benefit from this Book
Don’t buy this book.
3 of 3 people found the following review helpful.
Good summary of behavior and value investing ideas; comes with a free eBook copy!
By Taylor
Note: I received a promotional copy of this book from the publisher in exchange for sharing my thoughts AFTER reading it.
Professor Failure
What can we learn from failure? Aside from the fact that there’s an entire industry of business literature fetishizing the idea that it has much to teach us (as a kind of doppelgänger to the decades of success literature that took a person or business’s success as given and tried to look backward for an unmistakeable pattern that could’ve predicted it) I’m personally skeptical of what failure might teach. Life is complex and there is often little to separate the failure and the success but timing and luck in certain endeavors.
So, I approached Freeman-Shors book with some trepidation as the subtitle of the book suggests this is a study of failure. Au contraire, what we have here is actually a psychological or behavioral study, somewhat in the vein of Benjamin “you are your own worst enemy in investing” Graham, which studies not failure per se, but rather how investors respond differently to failure and thereby either seal their fate or redeem themselves.
A Behavioral Typology
The book recounts the investment results of several different groups of portfolio managers who were categorized, ex post facto, into various groups based upon how they reacted to adverse market conditions for stocks they invested in. The Rabbits rode most of their failed investments down to near-zero before bailing out and taking the loss. The Assassins had a prescribed set of rules for terminating a losing position (either a % stop-loss, or a maximum time duration spent in the investment such as a year or a quarter). The Hunters kept powder dry and determined ahead of time to buy more shares on a pullback (ie, planned dollar-cost averaging).
While I am suspicious of backward-looking rule fitting, I do think the author’s logic makes sense. What it boils down to is having a plan ahead of time for how you’d react to failure. The Rabbits biggest mistake is they had none whatsoever, while the Assassins managed to protect themselves from total drawdowns but perhaps missed opportunities to profit on volatility rebounds. The author seems most impressed with the Hunters, who habitually started at a less than 100% commitment of funds to a planned position and then added to their investment at lower prices when the market gave them an opportunity to do so.
Freeman-Shor’s point is that when the price falls on your investment you need to decide that something material has changed in the story or facts and you sell, or else you need to be ready to buy more (because if it was a good buy at $10, it’s a great buy at $5, etc.) but you can not just hang tight. That isn’t an investment strategy. This is why I put this book in the Benjamin Graham fold, the message is all about being rational ahead of time about how you’d react to the volatility of the market which is for all intents and purposes a given of the investing landscape.
Learning From Success, Too
The author goes over a couple other behavioral typologies, Raiders and Connoisseurs. I won’t spoil the whole book, it suffices to say that this section is worth studying as well because it can be just as nerve-wracking to try to figure out whether to take some profit or let a winner ride when you have one. Freeman-Shor gives some more thoughts based on his empirical observations of other money managers who have worked for him on when it’s best to do one or the other.
More helpfully, he summarizes the book with a winner’s and loser’s checklist.
The Winner’s Checklist includes:
-Best ideas only
-Position size matters
-Be greedy when winning
-Materially adapt when losing
-Only invest in liquid stocks
The last bit is probably most vital for a fund manager with redeemable capital.
The Loser’s Checklist includes:
-Invest in lots of ideas
-Invest a small amount in each idea
-Take small profits
-Stay in an investment idea and refuse to adapt when wrong
-Do not consider liquidity
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It is hard for me to decide in my own mind if this book is a 3.5 or a 4 on a 5-point scale. I think of a 5 as a classic, to be read over and over again, gleaning something new each time. This would be a book like Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions) or The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials). A 4 is a good book with a lot of value and a high likelihood of being referenced in the future, but not something I expect to get a new appreciation for each and every time I read it. A 3 is a book that may have been enjoyable overall and provided some new ideas but was overall not as interesting or recommendable.
While I enjoyed this book and did gain some insight from it, and I think the editorial choices in the book were bold, it’s closer to a 3 in my mind than a 4 just in terms of the writing and the ideas. I’ve found a lot of the content in other venues and might’ve rated it higher on my epiphany scale if this was one of the first investment books I ever read.
But something that really blew me away is that the publisher, Harriman House, seems to have figured out that people who buy paper books definitely appreciate having an e-Book copy for various reasons and decided to include a copy for free download (DRM-free!!) in the jacket of the book. This is huge. I read my copy on a recent cross-country flight and was really agonizing about which books from my reading stack wouldn’t make the trip for carry-on space reasons and then realized I could take this one with me on my iPad and preserve the space for something else. That’s a big value so I am going with a 4 as a result.
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