Posted By: Guest PostPosted date: September 16, 2015 03:50:11 PMIn: Top StoriesNo Comments Excerpt from: Lee Freeman-Shor. The Art of Execution: How the world's best investors get it wrong and still make millions (published by Harriman House) The Art Of Execution - The Hunters: Pursuing Losing Shares by Lee Freeman-Shor Rather than killing an underperforming investment and forgetting about it, the hunters stalked their prey – watching it get steadily weaker and lassoing another limb every time it stumbled. Then they sat back with their prize and waited for it to recover, eventually selling it on for a handsome profit. In gambling, such behavior – effectively doubling down – is known as the Martingale approach. It is frowned upon and rightly so: it often leads to ruin. But in well-chosen investments, this is a strategy that wins over time – you acquire more and more assets at cheaper and cheaper prices. When the price of the assets goes up above the average price you have spent, even if it is hardly motoring into new highs, you will be making money. Let me stress at the outset that the Hunters, like all successful practitioners of what is called ‘dollar-cost averaging’, planned beforehand to buy more shares if a price fell. So they did not go all in on day one. Rather, they invested a lesser amount at the outset and kept some cash on the side – waiting for an opportunity to buy more at a lower price in the future. The key reason for the Hunters’ approach lay in their invariably contrarian style. They were value investors. They generally found themselves buying when everyone else was selling, and this was an extension of that philosophy, another way of exploiting Mr Market when he was acting irrationally. The approach the Hunters took is a little like the one many of us adopt when it comes to bargains in the January sales – putting off purchases beforehand because we believe what we’re after will end up getting sold at a significant discount. Unlike in a January sale, you don’t have to queue up outside for hours and fight your way through fellow bargain-hunters: you can slowly acquire more and more of your purchase as its price gets slashed. Success starts from failure There is a surprising overlap in early investing experiences among the Hunters. Near the start of a significant number of their careers, the Hunters had the good fortune of having a terrible year. It was a year in which they lost many of their investors a lot of money – and soon found themselves losing a lot of their investors. By the end of one early traumatic period, one Hunter I worked with told me he only had a single client left. The reason this turned out to be fortunate was because of the lessons the Hunters learned. They are what ultimately led to them delivering returns that made both them and their clients very wealthy indeed. The Hunters realised that being a contrarian investor is dangerous because you are always going against the crowd. As such they became experts on interpreting charts and other methods to truly gauge the crowd’s sentiment. After all, it was no use buying when the crowd showed no signs of changing its mind any time soon. It burned into their minds the important fact that just because something is cheap does not mean you should buy it. They also grew unafraid to sell if it became clear they really had made a mistake. Poor value investors I have come across refuse to adapt when they are losing and tend to support their lack of action by saying, “I got it wrong but the stock is simply too cheap to sell now.” A bad contrarian investor can make for a very committed Rabbit. But if a stock still passed the vital ‘Would I buy this knowing what I know now?’ test, the Hunters followed their plan, and started to put their money on the side to work as the share price dropped. Snatching victory Some of the Hunters working for me did not simply buy more of a stock if it fell beyond a certain trigger point, say 20%. Rather, they enjoyed trying to pick the bottom, buying in at the greatest possible discount, something that is very hard (if not impossible) to do. I saw a number of the Hunters get too many of these calls right to think they were playing a losing game. That said, the rest of us are probably better off doing what the others did and simply buying significantly more shares when a stock price falls between 20% and 33% (the reasons for this were covered in the previous chapter: that was the range in which the data made it clear it was sensible to materially adapt). The exception is if our conviction in a stock has lessened for a good reason. In that case we should do exactly as the Hunters also did, and sell. I saw the Hunters double or treble their holdings at the bottom on several occasions and then enjoy the “rewards as the shares recovered. It was clear that such moments gave the Hunters a real adrenaline kick: apparently there is no better feeling than snatching victory from the jaws of defeat. Be under no illusions: being a Hunter requires patience and discipline. You have to expect a share price to go against you in the near term and not panic when it does. You have to be prepared to make money from stocks that may never recapture the original price you paid for your first lot of shares. If you know your personality is one which demands instant gratification, this approach is not for you. “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.” - Peter Lynch Let’s look at some examples of the Hunters in action. CASE STUDY: Aker Solutions Aker Solutions is a Norwegian oil services company headquartered in Oslo. It is a global provider of products and services related to the construction, maintenance and operation of oil and gas fields. One of my Hunters bought this stock on 14 April 2008 at an initial price of €15.84 per share. Roll on a year and a half and the share price had plummeted. On 28 September 2009 my investor seized the opportunity to exploit Mr Market and bought significantly more
if you believe that eventually it will trend, even a small position if left unchecked can add up to a sizable loss Isn't that really the question? Will it keep trending, or will it turn? Some add to winners betting it will trend. Others add to losers betting on the turn. Nothing earth shattering, you are either betting on the trend or the chop. I don't like to talk about it because I am tired of defending it. Me personally? That's all I do all night and day is add to winners and losers and take losses. Taking a loss frees up margin which you will need to add to winners and losers.