Key Insights
1. A Losing Bet Is Not Always a Loss, Unless You’re a “Rabbit”
In his research, which later formed the basis of the book, Freeman-Shor set a clear condition for participants: They were to start by investing in the ten ideas they believed had the most potential. As you can imagine, not every promising idea can become successful. However, the author does not focus on ideas but on investors. More precisely, on the types of behavior in case of losses: the Assassin, the Hunter, and the Rabbit.
The Assassin takes a disciplined, cold-blooded approach by eliminating underperforming stocks after a set period, while the Hunter seeks to capitalize on declining stocks, buying more at lower prices with the hope of a future rebound. Both strategies are effective and share a key trait: decisive action in the face of loss. This proactive behavior sets them apart from the final and loss-only role model, the Rabbit, which represents inaction in the face of adversity.
Successful stock market investing is not about being right per se – far from it. It comes down to how great ideas are executed.
— Lee Freeman-Shor, The Art of Execution
The Assassin and Hunter used their respective strategies to recover from losses, break even, or even turn a losing position into a profitable one. In contrast, the Rabbit took no action, holding all 10 shares and relying on hope for recovery. From Freeman-Shor’s observations, this passive approach typically resulted in mounting losses in the short term (1-3 years), especially when stocks continued to decline or market conditions became unfavorable over time.
As history shows, markets eventually recover and reach new highs after even the most significant downturns. Although Rabbit's stance may take more than 3 years to recover, markets usually do so, allowing their investments to benefit from natural market recoveries.
This explains how Rabbits also made profits, although the pace was significantly different from the Assassin and the Hunter. A short-term horizon may indeed demand more active strategies, but the most effective balance between risk and return has always been achieved by focusing on the long term.
2. Racing on Winning Stocks Does Not Build Wealth
Investor behavior in a winning scenario is even more intriguing than in a losing one. Here, the author identifies two distinct patterns of behavior. One group – Raiders – harvests their gains too early, settling for small victories. The other group, Connoisseurs, however, savor the experience, allowing the fruits of their patience to ripen.
Raiders sell their shares prematurely for many reasons, all driven by emotion. Some fear a potential market downturn and sell at the first sign of profit, others grow bored with their positions, and some simply can’t resist the urge to lock in gains. In most cases, these investors later regretted their haste.
The author suggests adopting the Connoisseur's approach, as successful investing is a long-term commitment. Much like a winemaker who lets grapes mature in the sun, the Connoisseur allows investments to flourish over time, maintaining a patient and strategic approach. A prime example of this mindset is Warren Buffett, the renowned advocate of the buy-and-hold long-term investment strategy. His approach can help investors avoid the pitfalls of short-term thinking and achieve lasting success, a model for many investors.
The Connoisseur demonstrates the necessary mindset for sustainable growth by holding onto winning stocks and allowing them to increase in value. While the short-term approach may lead to quick profits, as exemplified by Raiders, it often resembles betting, with less predictable outcomes. Value investing, in contrast, is focused on the long term, where patience and discipline tend to yield more consistent rewards — an approach that most prudent investors, like Seth Klarman and Warren Buffett, always favored.
3. Analytical Skills Are the Key to Success
There is nothing like an idea whose time has come. In investing, a lot of success can be attributed to being in the right place at the right time – otherwise known as luck.
— Lee Freeman-Shor, The Art of Execution
Having analyzed every investor's behavioral pattern, one might wonder if the Connoisseur and the Rabbit are the same. Both hold onto their shares and wait, so why do Rabbits always seem to come up short?
The similarities between the Connoisseur and Rabbit are only superficial; waiting for investments to mature is not the same as doing nothing. Just as wine fermentation requires careful monitoring and patience, successful investing involves strategic decision-making. While the Rabbit simply bides its time, Connoisseurs remain vigilant and are prepared to adjust their strategy as necessary.
For instance, ultra-high-net-worth individuals often shift from traditional 60/40 portfolios of stocks and bonds to a more diversified mix of public and private assets. This flexibility in strategy ensures that investments can adapt to changing market conditions and continue to grow effectively.
