TIP805: Stock Market Maestros w/ Kyle Grieve

**The Investor's Podcast Network** (0:00)
You're listening to TIP.

**Kyle Grieve** (0:02)
The world's best investors are wrong more often than they're right. Let that sink in for a minute. The elite investors profiled in today's episode had a median hit rate of only 49%.
This means they actually lost money on the majority of their picks. However, they have also dramatically outperformed the market. How is this even possible, you may be wondering? They made a lot more money on their winners than they lost on their losers. Today, we're going to look at key lessons from the book, Stock Market Maestros. I honestly think this book will help reshape just how you think about portfolio management because it does an exceptional job of showing why treating your winners and losers is vital to investing success. The problem that most investors have is that they optimize for finding the next great stock pick. But the real edge in investing lies in how you manage what's already in your portfolio, specific strategies for how you enter and size a position, how long you hold it, and how to exit properly are more important than finding your next great idea. So today, I'll discuss three important metrics used in this book to distinguish truly skilled investors from just the lucky ones. You'll learn why riding winners is so crucial to performance, you'll learn why losers are costing you more than just money, and you'll walk away with simple strategic ideas to ponder that can help you better handle winners and losers like some of the world's greatest investors. So no matter if you're a novice investor or have been investing since before the tech bubble, this episode will really get you thinking about how to best manage your portfolio for our performance. Now let's get right into this week's episode on Stock Market Maestro's.

**The Investor's Podcast Network** (1:36)
Since 2014 and through more than 190 million downloads, we break down the principles of value investing and sit down with some of the world's best asset managers. We uncover potential opportunities in the market and explore the intersection between money, happiness and the art of living a good life. This show is not investment advice, it's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your host, Kyle Grieve.

**Kyle Grieve** (2:19)
Welcome to The Investor's Podcast. I'm your host, Kyle Grieve, and today I'm going to cover a book that I found highly, highly illuminating and helpful regarding portfolio management, especially in regards to handling both winners and losers. So the book is titled The Stock Market Maestros by Lee Freeman Shore and Claire Finn Levy. Now, the reason that I enjoyed this book so much was that I went over these three super simple metrics that really helped find managers that they wanted to interview for the book. Then they had a bunch of these great case studies on how each of these outperforming managers handled real life examples of both winners and losers. After doing my recent episode on lessons from venture capital, it's really got me thinking just how important it is to handle your winners properly. Now reviewing my own numbers, I realize that I've tended to do a pretty good job with my winners, but I can maybe eke out some more returns if I also find some way to mitigate risk for my losers in a more strategic way. So I was very excited to read all of the interesting strategies that these investors do. And they are very varied. So there are literally strategies for all sorts of investors, whether your average holding period is 10 years or 15 months, you're going to find something very interesting, strategically speaking, from this list of outperforming investors that I go through. Now, just to get you prepared here, I didn't cover all of them because there was just way too many details that I wanted to go over, so I just covered a couple of them. But let's start us off by quickly going over Lee Freeman Shor's basic concepts from his first book, The Art of Execution. That book covered the winning habits of 45 of the world's top fund managers. So in it, Freeman Shor focused on these investors' behaviors and actions, categorizing them into five different categories. These categories were based on how they reacted to winning and losing stock ideas. So the five categories are number one, rabbits. This is when you have a losing position, you just do nothing. Number two is as an assassin. Assassins, when they have a losing position, tend to cut their position before too much damage is done. Number three is hunters. When they have a losing position, they materially add to the position. Number four is raiders. When they have a winning position, they tend to cash out after they just make a small game. And then number five is connoisseurs. When they're winning, they ride the winner and they try to win big. Now Lee's finding was that the success or failure was largely determined by how an investor behaved after making an investment. The book states that the top investors' best ideas makes money only 49% of the time. This means that 51% of the time, they're actively losing money on their ideas. Now this data is very interesting and somewhat aligns with other legendary investors such as Peter Lynch and John Templeton. Both of whom guessed that they made money on about 50 to 60% of their ideas. Now when Freeman Shore wrote his first book, he was shocked at that figure. How was it that the world's best investors were able to outperform the market when they were just wrong more often than they were right? And the answer is pretty simple. They just make a lot more money on their winners, which helps offset their losers. The winners also fit neatly into three of the categories that Lee devised. So they were all connoisseurs who squeezed as much as possible out of their winners. But when it came to losing, they all had different strategies. Some of them were assassins, quickly selling out of positions before any real capital was put at risk. Or they were hunters and had so much conviction in their ideas that they just simply add to them when they went down a price. The book I'll be going over today will go over exactly how many of the world's top fund managers handle their winners and losers. Freeman Shor brought on his co-writer Claire Finn-Levy who owns an analytics company called Essentia Analytics. It's a fintech that specializes in analyzing the behavior of professional investors to deliver unique and helpful insights. The software will go through a fund manager's trade history and it helps identify trends in their own behavior.