“I Sell My Winners Too Early and Hold Losers.” How behavioral analytics can help active investors from repeatedly making the same mistakes. Julie Segal November 08, 2019 David Paul Morris/Bloomberg Thirty years of research in behavioral science has taught us how human brains are wired and how emotions drive decisions. Still, active portfolio managers — even though they are in a vicious war with index funds — are frittering away their excess returns by making predictable mistakes. “Information, and even computation, these days are commodities. Our value has to be in our critical thinking and human intuition,” said Brandon Snow, principal and CIO of $160 billion-in-assets Cambridge Global Asset Management, speaking at Essentia Analytics’ Behavioral Alpha conference in New York on Friday. Cambridge has created systems to track decisions and help its fund managers avoid well-known behavioral mistakes, such as holding on to losing stocks too long. “I sell my winners too early and hold losers. That has important outcomes,” said Snow. “My group saw a similar pattern,” he added. Now that it has almost three years of robust data on its team, Cambridge is creating a buddy system and pairing fund managers who are lacking a skill — like profitable selling behavior — with somebody else with that specific talent. Cambridge is also beginning to share data it collects on behavior with consultants and other gatekeepers, demonstrating that they actually follow their investment process. “They’ll see all of our decisions,” he added. [IIDeep Dive:Active Equity Managers Actually Do Generate Alpha. Here’s How They Squander It.] Responsible Junk[/paste:font] To capitalize on decades of behavioral research findings, some managers are collecting as much data as possible on their investors’ daily decisions. Some people bristle at the intrusions. “We use that as a screening tool. If people aren’t willing to do this, we don’t want you,” said Tom Tully, portfolio Manager at Aperture Investors, at the conference. Tully added that an active manager needs to be rigorous in preserving the alpha it creates. That’s because Aperture, founded by Peter Kraus, former CEO of AllianceBernstein, charges management fees comparable to index funds. Clients then pay an incentive fee if the manager can generate alpha. Aperture is just getting started designing systems so it can tag every piece of data about its portfolio managers’ decision-making. “Instead of just saying it, we can prove we are data driven,” said Tully. Cambridge collects daily information from portfolio managers and analysts, including how much sleep they had, exercise, their personal life, and whether they were happy or sad. The firm is looking for patterns. On a bi-weekly basis, it reviews best and worst ideas and goes over questions such as what the manager would sell if he or she had to. Snow said that when he looked at his own trading activity, he found that 40 percent of his decisions on small positions and small stocks added no value. “That’s 40 percent of my brain power,” he stressed. https://www.institutionalinvestor.c...m=I Sell My Winners Too Early and Hold Losers
Concern with selling winners too early indicates a trade-focused mind-set. Focus ought to be on the trend, not the trade: i.e. on the objective, not the battle. It reflects concern at the risk to unrealised gains rather than the growth of realised gains. To counter this anxiety - take trades only with the trend, exit manually on weakness, set a new entry order at resumption of strength.
tomorton, Let's discuss your post here please. It is well stated, but here is the problem, a trader has to know why to trade with trend, how to define trend logically and repeatedly, and how to re enter with trend if stopped out. From my experiences, which is still growing and facing my own challenges with trading. My biggest problem is learning how and why to trade and think a certain way. In order for ME to correct, I had to invest time in skills building and practice. In addition, I had to invest money in buying trading education to build skills. I prefer to trade with trend per the timeframe I trade. The problem, I believe a trader faces is lack of skills, lack of confidence, and lack of understanding why to trade a certain way that is logical and makes sense. For me, I had to drill it in my head and write down "There is no sense in me risking capital if I am not trading in the direction price is already moving" "I am not smart enough to pick top and bottom, so don't do it."
Famous quote from PTJ goes something like this... "Conventional wisdom is to avoid picking tops and bottoms. I've made 10 times more money picking tops and bottoms than I ever did trying not to".
This is just bullshit. The "cutting losers too late and winners too early" is neither a psychological nor emotional problem. People have no edge, that's why. They punt and have no idea why the position should work out and what the trigger is. If you don't know why it works, you also have no idea when it doesn't and your edge is gone....which is usually the signal to get out, no matter what your P/L is.
Thanks Scataphagos, Who is PTJ? good quote and I agree with you. Yes, picking tops and bottoms can be profitable if a trader is skilled in picking tops and bottoms. I am still learning and practicing how to pick top and bottoms, or reversals against current trend. One day I will be skilled in picking tops and bottoms. I believe trading is an ongoing learn curve.
Some good points, and thanks. There is no need for a universal definition of a trend. My trend is the trend I can trade well using my strategy: your trend is yours. In the context of my trend, I might say a weakness in an uptrend is the first daily bar with a lower high: a re-entry signal in the same trend might be the breach of the same bar's high by rising price. You might use a different set of signals as you are trading in a different trend context. That's fine, its not key. I think what is key is getting back into a trend you have exited with minimal time delay, moderated by acceptable level of confirmation of trend continuation. But this is a recipe for overcoming selling winners early anxiety, I can't claim its a complete and universal trading strategy. Its just that anyone who has selling winners early anxiety syndrome is already on the wrong path when they entered the trade.
Yup. Retail is really just a cluster f. All trading random noises. Sometimes loser comes back. Sometimes not. There is simply no money to be made short term. And traders are just make shit up in their own heads.