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In this post, you'll learn how to execute your investment strategy like the pros. It breaks down key tactics from top investors on handling both winning and losing stocks. You'll discover practical tips to cut losses early, let winners run, and strategically double down on the right opportunities. This guide helps you make better decisions to increase your returns and avoid common pitfalls. If you want to sharpen your investment game, this article is a must-read.
This article is a summary of my notes from the great book The Art of Execution: How the world's best investors get it wrong and still make millions by Lee Freeman-Shor.
Read it if you have not already it’s a great book that will help your returns.
The idea behind the book makes it so interesting.
Summary on Amazon:
“Over seven years, 45 of the world's top investors were given between $25 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 lost money. Shockingly, a toss of a coin would have been a better method of choosing whether 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.”
Your Guide to Smart Investment Decisions
As you have realised, knowing when you must buy, and sell is the key to great returns. Whether you're winning or losing, your actions determine your success.
This guide focuses on how you can make better investment decisions.
You'll learn how to:
- Handle both winning and losing positions,
- Cut losses, and
- Make the most of gains.
By understanding these ideas, you can greatly improve your investment performance because you are making better decisions.
When You Are Losing
Take Action!
Investors often struggle with big losses, leading to inaction. Holding on to losing stocks, hoping they'll bounce back, is a common mistake. This mindset comes from wanting to be right rather than profitable. It may have been your bad luck, but doing nothing is a bad idea.
If your stock drops further, the loss can get worse; if it rises, you miss an opportunity.
Use a 20% drop is a point to reassess your position. Make it clear to yourself that doing nothing is not an option. Act before losses get out of hand.
The Rabbit Strategy: Inaction Leads to Bigger Losses
Lee describes Rabbits as investors who freeze when they face a loss.
They hold onto stocks in the hope of a recovery. But hope is not a strategy, and it is also not going to help your returns.
This strategy can lead to bigger losses because they avoid admitting they were wrong. To break free from this trap, take a proactive approach to cut losses early.
Remember, not deciding is a decision!
Click here to start finding ideas that EXACTLY meet your investment strategy.
Cut Losses Fast: Be the Assassin
Big losses can destroy your portfolio if left unchecked. So, cutting your losses quickly is crucial. Research shows that most losing stocks keep underperforming, so selling early is usually the best decision.
Interestingly Lee mentions that the largest part of losses in bear markets come in the final third of the fall. So getting out early would have been a great decision.
Also, Lee’s data found that only 37% of stocks that lost money when he sold went on to return more than 20%. So, 66% (or 2/3) of the time you are making a great decision by cutting a losing investment.
So, setting a trailing stop loss is a great idea to protect your portfolio.
Assassin’s Actions:
Slight Falls: Cut losses early, usually within a 10% loss.
No Recovery: Sell if no recovery is seen after a set period. Usually six months.
Substantial Falls: Sell immediately to avoid further losses. Use a 15% or 20% trailing stop loss.
When to Double Down: Become a Hunter
Some investors buy more of a losing stock. This approach, also called dollar-cost averaging, involves buying more shares as prices fall, this lowers your avarage buy price.
But this strategy needs careful planning. To implement it you need to think of the following:
- Start with a smaller initial investment so you have cash for future buys.
- Decide whether to be an Assassin or a Hunter when facing a loss.
- Cut your losses or invest more in if you think the stock will recover.
Hunter’s Actions:
Falls: Buy more shares at lower prices if fundamentals are strong.
Signs of Recovery: Hold and possibly add more shares.
Continued Falls: Reassess fundamentals; continue buying if strong or sell if weak.
When You Are Winning
Keep Winning Positions
A lot of investors sell winning stocks too early, missing out on a lot higher gains. Successful investors focus on a few big winners, which helps offset poor investments (that they sold fast for a small loss).
Also, investors that take profits fast, within three to six months, may be missing out on substantial returns over the long term.
The thing is, only about half of your ideas are going to make money, so it's important to ride your winners for maximum gain.
Here are two strategies you can use when sitting on profits.
The Raider Strategy: Take Small Profits
Raiders take small profits quickly, often selling winning stocks too early. While this strategy can give some gains, it often leads to missed opportunities for larger returns.
Lee mentions that 66% of all winning investments were sold for a profit of less than 20%. Of these, 61% kept going up. So, if you held on to these you would have made even more money.
The advice is, do not sell winning investments too fast hold them for more growth.
Resist the urge to sell a winning investment too fast for a small profit. Put a trailing stop loss on it (15% to 20%) and let it run.
Connoisseur Strategy: Enjoy Every Last Drop
Connoisseurs win big by holding onto winning stocks longer than most investors would be comfortable with. To do this you must avoid being scared out of positions and gradually take profits as stocks rise .
This balances potential gains with risk reduction.
Lee research showed that only one-in-three of the Connoisseurs’ ideas made money. In other words, a Connoisseur was also an Assassin or a Hunter when it came to losses .
The Pareto principle would say that 80% of your investment gains come from 20% of your investments. This shows that a few big winners can make a big difference.
Sipping profits over time helps capture gains while protecting against downturns or should the company disappoint.
Connoisseur’s Actions:
- Slight Rise: Hold, avoiding early selling.
- Significant Rise: Take small profits gradually.
- New Opportunities: Maintain core positions in winners, add to new investments.
- Falls: Either cut your loss or sell (Assassin) or buy more (Hunter).
Click here to start finding ideas that EXACTLY meet your investment strategy.
A Checklist: Crafting Your Winning Strategy
Here is your checklist on how to invest like the best!
Focus on Top Ideas
Concentrate on a few high-conviction investments. One or two big winners are crucial for success. Avoid putting all your money in one idea because of bad luck may happen. Also, with only a 50% chance of buying a winner you must diversify.
Position Size Matters
Invest a significant amount in each idea, but not so much that one decision can ruin you. Balance your risk by having multiple opportunities for success. You can also add to winning positions and do not have to go all in at first.
How many stocks you may be thinking. Well, it depends.
- For large-cap portfolios, 15 stocks should work well.
- For small-cap portfolios, you are best diversified with around 30 stocks.
How many companies also depends on how much research you do. If you know what the CEO had for breakfast you can have less position (say 15) compared to if you use a quant like strategy where do no research (over 50).
You can also use this great tool Target Weight in the screener to find your best position size.
Run Your Winners
Develop a mindset that allows you winners run. Remember BIG returns are possible so avoid taking quick profits by selling out of winning investments too fast.
Add a trailing stop loss of 15% to 20% on stocks that may have run too far in your mind. This will automatically take you out when they turn.
Do not forget to take small profits on the way up so that the stock does not become too big a position.
Click here to start finding ideas that EXACTLY meet your investment strategy.
Adapt When Losing
Know that you will face losses so have a clear plan to address them. Either invest more or sell it.
Just decide that just holding a losing position is not an option.
For example, at a loss of 20% either decide to:
- Sell or
- Add a meaningful amount to the position.
Also, at a loss of 10% after holding for six months, either sell or add more.
This gives you a chance to change the outcome. Either you add more to a good investment, or you sell a loser.
Invest in Liquid Stocks
Make sure all your investments are easily tradable. This means easily allowing you to execute your strategy without moving the price or not being able to invest or get out at all.
Liquidity can make big sudden changes but generally consider average daily value of:
- 20 times your investment for long term investments or
- 100 to 1000 times for trading positions.
Your Winning Checklist - Five Winning Habits
1. Best Ideas Only: Focus on a few top ideas.
2. Position Size Matters: Invest significantly but not all-in.
3. Be Greedy When Winning: Let winners run.
4. Adapt When Losing: Add significantly to or cut losing positions.
5. Invest in Liquid Stocks: Ensure liquidity for flexible execution.
Frequently Asked Questions
1. What should I do when my stock is losing value?
Act quickly. If your stock drops by 20%, reassess. Don’t hold onto it out of hope. Decide whether to sell or invest more if you believe in its recovery.
2. How can I avoid big losses in my portfolio?
Set a trailing stop loss, typically around 15-20%. This automatically sells your stock if it falls below a certain point, protecting you from further losses.
3. Is it smart to buy more of a losing stock?
Only if you believe in the stock's fundamentals. Start with a smaller initial investment, so you have cash to buy more if the price drops.
4. When should I sell a winning stock?
Resist selling too soon. Let your winners run but use a trailing stop loss to protect gains. Gradually take profits as the stock rises.
5. How can I make the most of my winning investments?
Hold onto big winners longer and avoid the temptation to sell early. These few big gains can offset other smaller losses.
6. What’s the best way to handle losing investments?
Have a clear plan. Either cut your losses early or decide to invest more if you still believe in the stock. Doing nothing should not be an option.
7. How do I choose the right stocks to invest in?
Focus on high-conviction ideas. A few top investments can drive your success, so don’t spread yourself too thin.
8. How many stocks should I have in my portfolio?
For large-cap stocks, around 15 is a good number. For small-caps, aim for around 30 to diversify and balance your risk.
9. What’s the importance of position size in my investments?
Invest significantly in each idea but don’t go all-in. Balance your positions to avoid one bad decision ruining your portfolio.
10. How can I ensure my investments are easy to trade?
Choose liquid stocks with enough daily trading volume. This allows you to execute your strategy without moving the market price too much.
Start using the power of these winning execution strategies today by signing up for a stock screener subscription.
Click here to start finding ideas that EXACTLY meet your investment strategy.
