Am I an assassin or a rabbit, a raider or a connoisseur?
Am I an assassin or a rabbit, a raider or connoisseur?
I have just finished one of the best investment books I have read in a long time; it contains some great little gems, which I hope will improve my returns. One never stops learning; I continually strive to become a better investor and what better way than by learning from the mistakes and insights of others.
“The Art of Execution; How the world’s best investors get it wrong and still make millions” by Lee Freeman-Shor, took no more than a couple of hours to read and comes highly recommended.
Background
Through his job at Old Mutual, the author appointed 45 external investment managers, to manage concentrated portfolios, valued from $20m to $150m, between 2006 and 2013. He instructed them to invest only in their best 10 ideas and he not surprisingly got very divergent results. In this book he observes the differing methods of the managers; he found that in general, all the managers were much of a muchness when it came to picking stocks; of the 1866 investments made only 49% made money but what separated the winning portfolios from the also rans, was execution. Some of the “legendary investors” were only right 30% of the time but still made money overall!
He found the managers fell into five categories. When it came to handling losing investments they were either assassins, hunters or rabbits and when dealing with winners, either raiders or connoisseurs.
In short:
- An assassin is an investor who deals promptly and unemotionally with his failures; cuts early, or at least at a pre-determined level and moves on.
- A hunter tends to watch, analyse and then at the right time add, in attempt to average down and salvage the investment. Many were successful with this strategy; never perhaps regaining the whole loss but at least reducing it.
- A Rabbit! Need I say more. They watched the investment continue to fall, neither cutting nor adding. The rabbits tended to have the worst performance by far.
- Raiders were managers who snatched at any profit they made; 10-30% was enough. The money was then re-invested and as we saw earlier, only with a 50%ish chance of success.
- The connoisseur however, let the winners run, perhaps trimming now and then but at least having a decent exposure to the holding for the duration. These were the investors who made 100% or more from investments.
The best combination was the assassin/connoisseur and by far the worst were the rabbit/raiders; they invariably ended up being sacked.
In conclusion, an excellent read and hopefully one that will sharpen the investment skills.
Lessons for me
An assassin or a rabbit?
Over the last four years, since I launched the JIC Portfolio in January 2012, I have considered myself more of an assassin than anything else. I have cut some holdings quite quickly, say after a 20% loss and in most cases those stocks have continued to drop. To be honest, whether they dropped further or promptly rebounded is slightly irrelevant; the point is, I sought to minimise damage to the overall portfolio and move on.
In a few cases, I have acted like a hunter, adding to losing positions but I think my success rate here, has been no more than 50:50. In the last six months or so I have noticed a few rabbit like tendencies creeping in; I currently hold three stocks of my 30, which are down 33%. The problem with a stock that is down 33% is that it has to gain 50% just to get back to break even! I will come up with a battle plan for those stocks and others in the Portfolio in the coming days. Going forward, I will endeavour to banish any rabbit like leanings and keep my assassin’s rifle loaded.
I will also rethink my strategy around “Stop Loss Review Levels”; it is all very well reviewing but there is always a good reason to put off doing anything. Perhaps setting a firm stop loss would remove the emotion. I have always found that once done, selling out of a losing position leaves a wonderful feeling; you no longer spend an inordinate amount of time worrying about what to do with the holding but can move on and re-invest the capital, hopefully in a winner.
A raider or a connoisseur?
When it comes to the winners, I believe I have acted more like a connoisseur than a raider. I have always believed in running winners and if the position is not too large, adding. I have also been happy to give a position a haircut when it becomes over extended; not only does this lock in some profits but it enables me to pick up stock on any setback. I still have decent holdings in stocks such as Crawshaw, (first bought in Nov 2013 at 13p), Baillie Gifford Shin Nippon (April 2013 at 280p), easyJet, (Jan 2012 at 408p), AdEPT Telecom, (Sept 2013 at 125p) and DixonsCarphone, (Oct 2012 at 138p) to name a few.
How many holdings?
The final point was on concentration in the Portfolio. The author found that the greatest success stories came from the fund managers’ best ideas, which begs the question, why not put more money into the best ideas, rather than dilute one’s efforts and returns, by adding more stocks? At the end of the day the number of stocks one holds is a personal choice but one has to be careful that in attempting to build a diversified portfolio one is not involved in an exercise of diworseification; Warren Buffett puts it another way; do put all your eggs in one basket but watch that basket very closely”. The number of holdings in the JIC Portfolio has been as low as 22 and as high as my self-imposed maximum of 30, which I am currently at, with the top 10 positions making up 51.4% of the Portfolio. I think there is some scope to rationalise the Portfolio and bring the number of holdings down again, focusing more of the Portfolio on my winning positions.
If in a year’s time, if I have benefited from sharpening up my discipline around execution and it has had noticeable results, I will contact the author and buy him lunch!
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
14 comments
The book appears to be clever in theory. But in reality I found it slightly ridiculous and completely wrong. The author appears to admire the trading approach of hedge funds. However, they have massively underperformed. The author dismisses stock selection but in reality this is what the connoisseurs must do to identify good companies. The author praises a number of hedge fund managers who have subsequently performed badly.
In my view, the book is just voodoo advice and is completely misguided. If you want to join the underperforming hedge funds then go ahead and follow the "lessons" of the book.
This looks on the face of it rather like adding a "narrative" with full hindsight after the event.
If you hold a stock which is currently down there are three things you can do:
1. Top up (Hunter)
2. Do nothing (yet) (Rabbit)
3. Sell (Assassin)
If you hold a stock which is currently up there are also three things you can do:
1. Top-slice (Connoisseur)
2. Do nothing (yet) (Connoisseur rabbit)
3. Sell (Raider)
The names seem a bit emotive suggesting that certain actions are "wrong" but usually you cannot accurately judge whether the action was "right" until you see how the stock performs subsequent to the action. A trigger-happy assassin who sells too quickly is just as bad as a trigger-happy raider selling too soon on the up-side. Equally a connoisseur who watches a stock rise by +100% and then let's it fall by -50% waiting for it to rise further turns into a rabbit -- but exactly at what point did he make the transition? So all the actions are perfectly valid at the right time.
If you are using a NAPS-like strategy then you would do nothing between six-monthly or yearly reviews. At the review, if the stock still qualifies you will rebalance (top-up or top-slice) and if it no longer qualifies you would sell. All the actions are valid and it is the reason why you chose one over the others which matters.
Personally I do not think that using a stop-loss between the review points is wise. Assume that you replace the sold stock with another one. If that replacement has basically similar characteristics to the previous one then the probability that it will rise or fall will be broadly the same as the stock it replaces. You can't be sure - purely because a stock has reached a stop - that this means that it will continue to fall. So the only good reason to sell at a loss part-way through a period should be that the material reasons for holding the stock have changed, and not an automatic action triggered by price.
From a statistical point of view you should expect that the performance of the stocks in a portfolio will always include one or two with extreme poor performance, one or two with extreme good performance and the rest in a mush in the middle. The big fallers are almost an inevitable consequence of the big risers. In fact if you use selection criteria which increase the volatility of the portfolio, you will get bigger risers and bigger fallers too. But you can't really chop out the big fallers "early" with a stop-loss because being a "big faller" in the future cannot be predicted by being a smaller faller earlier. The mechanism which "locks in" a profit in a system like this is the rebalancing, which approximates a sort of Kelly-based position sizing, not the culling of losers.
Super article, many thanks. Just read the book myself and thoroughly enjoyed it. The author of the book recommended never buying into small, illiquid stocks, therefore for a mid to large cap a 20-30% drop is much more likely to have been accompanied by bad news (SPD was mentioned here which is a good recent example, since just before Xmas it has issued a series of profit warnings) rather than market volatility. However if you are prepared to invest in smaller, more illiquid stocks a 20-30% drop may occur purely as a result of market volatility and here it may be more prudent to act as a hunter and buy the dips. I've found myself acting as both an assassin and a hunter as I do invest in both liquid & illiquid stocks; the lesson I will try to learn from the book is never to act as a rabbit.
But thats the US market, where there are more medium to larger companies than the UK market? Big is beautiful in the US not here. But yes some rules still apply and its one lesson to learn is to sell losers or even cut winners when there begin to fall.
Hi everyone newbe ish here.
Everyone is obviously looking for the holy grail.
Their r many roads to the same place.
R own emotions seem to b a big hurdle..so maybe its stockopedia buy circa high nineties and sell at? circa 90
within a balanced portfolio?
I would have been interested in the outcome if this had been applied by a so called professional.
Your view Ed?
Very interesting but the rather simplistic partitioning of these common tendencies ought perhaps to take into effect a few things, quite apart from the usual thing of everyone being wise after the event and fishermen's tales. It seems to me that I have all those characteristics, depending on the stock in question, the time of year and my state of mind about all of life and the state of the market overall. That raises the biggest quibble I have. Would you apply a stop lost more readily when the particular stock was heading south opposite to the general trend? I'd have lost a great deal of earnings potential if I'd reacted to some of the neurotic behaviour we've watched over the recent years but then, I am a dividend farmer, so maybe I have less sympathy for hunters and assassins?
Tango Doc. Sounds like your classification is "Sea Anemone". You attach yourself to a rock & come high or low tide you collect the food as it floats past.
Warren Buffett is often quoted on low diversification, but his own portfolio, including unlisted subsidiaries and special purpose deals is probably more diversified than a 100-stock small caps portfolio...
I'm slightly conflicted here as I try and view my portfolio as brand new every day with no reference to buy price but only to my assessment of each investments prospects vs. other stocks I may want to open a position in or increase weight. I do look at price action though to try and understand how other investors are behaving vis a vis each stock. My best results have been buying stocks that are unpopular and letting the market discover and re rate them as the promise I like to think I've spotted is realised.
Where I struggle is buying or adding to popular highly rated stocks, it feels all wrong but in hindsight I often end up missing a gem or two!
what i like about the assassin approach is that you are accepting you don't always make good investments but limiting the damage. to invest more on a significant drop requires very high levels of conviction in the stock that frankly for most private investors is not possible to have that knowledge. The assassin approach is much easier to incorporate into your investing rulebook and ensure that you dont have portfolio ruining losses, remember rule number 1!
My worse on at the moment is sports direct at -13% and tempted to cut my losses although feel its oversold on temporary bad news., it was +12% about 2 weeks ago, should have sold then as ive not got great conviction with SPD at the moment.
So if you already hold the stock and it goes up then you will top up if the share price falls? That seems a bit contradictory, should you not be using a trailing stop loss? Overall a 20% drop is a loss still, does not matter if the share is in profit or not? In fact as its gone up its worse because its more of a loss, take Easyjet went up x5, so 20% drop is 100% of your initial holding?
Indeed, logically if you believe and follow the assassin approach 100%, you should set a trailing stop-loss.
I'm in the middle of reading the book now.The thing that I dislike about it is that it says nothing about taking a fresh look at the stocks which had fallen to see whether the reasons for holding them were still intact.[you'd expect that there would be something wrong that would have caused the falls,but the stocks might still be cheap on fundamentals].
Surely all the author is doing is recording his observations.
I guess the Hunter is the one who readdresses and buys more because they think it looks even better value after the fall, (I was a hunter on Friday, adding to my holding in £NXT) but it does not get away from the fact that the Assassin achieved the better overall returns. I can think of many times in the past 30 years where I have been convinced I am right, bought more and watched the share price fall further. Perhaps it is best to unemotionally sell and move on.
I note even the great Lord Lee has started to use a 20% stop loss!