Reading a small paperback with a black cover entitled The Art of Execution on various train journeys over the Christmas and New Year period caused some interesting seat-shuffling reactions from fellow travellers.
But they need not have worried, as the execution referred to is only of investment transactions. And really the title is a little misleading, for while the book does indeed cover how some of the best fund managers trade, it is far more to do with the disciplines that they employ to avoid making classic investment mistakes than it is about the precise way or market that they trade.
It makes a good read for those looking to explore how human behaviour and those dreaded biases that are embedded in all of us can destroy the value in the implementation of even the very best investment ideas.
The author has done his homework – he scrutinised nearly 2,000 investments and more than 30,000 trades made by 45 fund managers over a seven-year period. Painstaking work.
As an institutional manager, the author was awarding mandates on behalf of Old Mutual Global Investors, Skandia as was, for the Best Ideas Fund. The brief was simple – only execute your very best ideas. In fact only 10 stocks that represented the very best ideas from the best fund managers, what could go wrong? Well quite a lot it seems – and only 49 per cent of these very best ideas made money.
The book then explores how, despite having a less than 50 per cent success rate, some managers are still able to make impressive returns.
Lee Freeman-Shor digs into many of the underlying trades and importantly into the behaviour exhibited by the managers when the trades go right or wrong.
Using different characters such as rabbits, assassins and connoisseurs, he explores the behaviour of different managers to assess the best strategies, not just for implementation of the initial investment into a “best” idea but most importantly how different manager ‘characters’ responded to the rises and falls of their investment.
There is a rich source of data of how managers, looking after over $1bn (£710m) in total, and between $25m and $150m each, responded in different situations. The book first explores what happens when things go wrong – when great ideas fall in value. And how different managers are – those who are either frozen by behavioural traits, or those who are aware of the inherent risks in so much of our human make-up and have devised and developed strategies not just to get them out of a hole, but to go on to profit from it.
In a structured and easy-to-follow way, Mr Freeman-Shor looks at the traits and techniques followed by different manager characters. He unpicks the errors of their strategies and provides practical ways they – and the reader – can avoid the mistakes and learn from the successes.
Whatever your view on active or passive management, this book provides a very useful summary of some of the behavioural biases to which we can all easily succumb.