The Art of Execution

The Art of Execution by Lee Freeman-Shor is a study of how some of the world’s best investors invest. Over seven years, 45 of them were given between $25m and $150m to invest by Lee in their ten best ideas. Despite being wrong most of the time, many of these investors still made alot of money, and this boiled down to their execution.

The author classified the investors into different categories:

1. The Rabbits
The Rabbits were the least successful of them all. They fell prey to many biases, framing, primacy, anchoring were some of them. The author advises that the only situation to a losing situation is to sell out or significantly increase your stake. Materially adapting is crucial in surviving and prospering. One of the reasons why the Rabbits held onto losing investments was the fear of the unknown: if they sold out, the shares might rally, and they would miss out. It was better to stick with a current loss than worry about a double whammy. The key question he dishes out to investors is “If I had a blank piece of paper and were looking to invest today, would I buy into that stock given what I now know?” If the answer is a no or a maybe, one should sell. Doing nothing when one is losing is never an option. Always have a plan of action as to what you would do in a losing position, even if you still think you are right.

2. The Assassins
The Assassins killed all losers at 20-33% using stop losses. Some sold stocks which went down by any amount and showed no signs of recovery after a certain period of time. In essence, the assasins cut their losses early when they realised the stories were changing.

3. The Hunters
The Hunters were a group of investors who added onto their bets when the odds turned from great to extraordinary. They purchased more of the stock when it dropped further, allowing them to recoup their losses and even make profits when the share prices recovered. They were confident in their analysis, and took action to support their beliefs.

4. The Raiders
The Raiders were not very successful in their investments as they tended to sell off their winning positions too quickly. The author shares that most of the successful investors he managed made money because they won big in a few names, while ensuring the bad ideas did not materially hurt them. Raiders, on the other hand, did not let their winners run, but sold it off at tiny profits due to fear and short term thinking.

5. The Connoisseurs
The Connoisseurs were the most successful of them all, treating each investment like vintage wine. If it was off, they got rid of it immediately, but if it was good, they knew it would only get better with age. Many of them were not interested in small scale success, but invested big and focused. They were not scared of riding a big winner and often practised taking some profit over time instead of selling it all at one go.

The author concludes with a winner’s checklist:

1. Invest in your best ideas only
2. Size up your position properly by investing a large amount of money in each idea, but not so much that one decision determines your fate
3. Be greedy when winning
4. Materially adapt when you are losing
5. Only invest in liquid stocks

Overall, I find this book a good read, and a reminder of some of the good practices out there in the investment community. The part I find the most challenging right now would be adding onto a losing position or cutting loss as it takes a strong belief in your analysis and the courage to act on it.


Sale of Overseas Education Limited

On 11/01/16, I sold off my stake in Overseas Education Limited at $0.49, at a loss of 46.7%. I sold it off as I believe that the current situation they are in now, ie. high depreciation costs and finance costs with low growth, will be the norm going forth. The pricing power that I thought they had was not really evident in the past few quarters. This is my largest realised loss ever, and there are a few lessons to learn from it.

Firstly, I overpaid for the shares at a PE of 18 when they were still running on a lean foundation. Ever since they expanded, profits had diminished due to higher costs, and the PE attributed to the stock also dropped, giving a double whammy to the share price.

Secondly, I overestimated their growth potential. Initially, I thought that the company was able to drive fees and student enrolment numbers up consistently after moving to their new campus, but it turned out otherwise. Many students left, and despite increasing fees, the school was still unable to maintain their profits. I learnt that growth is really difficult to predict. 

Thirdly, I was enamored by the numerous favourable analyst reports written on it, with target stock prices showing a significant upside from my entry price. I learnt once again that the words of analysts and brokerages are to be taken with a pinch of salt. 

On another note, I continued to sell off some of my holdings in Riverstone Holdings on 11/01/16 at a price of $2.46, giving me 175.7% in gains. The sale was mainly due to a reweighting of my portfolio as the stock was constituting a significant part of my investments.