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Book of the Month

Cover of The Art of Execution by Lee Freeman-Shor REVIEW BY OWEN JONES, FIDELITY PERSONAL INVESTING, 20 OCTOBER 2015

Lee Freeman-Shor is a fund-of-funds manager at Old Mutual Global Investors, one of the many fund partners available on our fund supermarket. His book isn?t really about investing, instead it?s more of an exploration of human behaviour under different types of stress, and this is what makes the book fascinating.

Freeman-Shor splits his investors into different ?tribes? to describe their behaviour. He finds that the same investors make the same mistakes, or do the right things, time and time again. What really matters, the author concludes, is how trades are executed rather than which company is chosen.

The most successful investors, Freeman-Shor argues, understand the influence of human behaviour on their work. The simple stop-loss gets top billing as a very effective way of cutting losses before they become too big to recover from (this tribe is named the ?Assassins?).

This is where Freeman-Shor excels himself, delving into the science of human behaviour and a suite of biases that affect our decision-making.

A lot of us will recognise these biases in our own lives. Framing bias or anchoring heuristic? These scientific terms mask behavioural traits that we can all relate to, and indeed Deal or No Deal is cited as an example of how our decisions are affected by other decisions we have recently made (recency bias).

Our tendency to hold on to investments when they are falling and to sell when winning is completely irrational. These tendencies are explored and real-life examples as to how the best investors reverse these tendencies ? and how the not so good ones get the sack.

Freeman-Shor also touches on how the culture of a fund house can adversely affect its fund managers. If annual-bonuses purely reflect performance a fund manager might be tempted to realise gains of 30% - a decent return ? when in fact holding on to the stock could have created a ?ten-bagger?.

This is the key for successful investing ? if you are only winning half the time, when you do win you need to win big. And to win big you need to be brave, to have a large position in a winner.

Freeman-Shor makes the point that a lot of funds are restricted in the position they can hold in one fund ? usually no more than 10% in one position.

This is meant to reduce risk, but really all that is happening is you are swapping one kind of risk for another. You?ll see the risk warnings on this site for funds that have a concentrated portfolio, Lindsell Train UK Equity is a favourite example ? note how the top ten holdings are all going to add up to far more than 50% of the total holdings; the upside being that if these funds rise in value, it has a bigger effect on the overall performance.

The risk is meant to be that should the shares fall, this will have a disproportionally negative effect on the value of the fund. But the risk of having too small a share in a company whose share price is rising is just as relevant.

This book is written to appeal to all kinds of investors, and is bound to appeal to both the author?s peers and to the inexperienced investor.

Fidelity rating: FIVE STARS
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