Some books are better in concept than they are in execution. Ironically, that is true of “The Art of Execution.”
The core idea of the book is that most great investors get more stocks wrong than they get right, but they make money because they let their winners run, and either cut their losses short or reinvest in their losers at much lower prices than their initial purchase price. From that, the author gets the idea that the buy and sell disciplines of the investors are the main key to their success.
I know this is a book review, and book reviews are not supposed to be about me. I include the next two paragraphs to explain why I think the author is wrong, at least in the eyes of most investment managers that I know.
From my practical experience as an investment manager, I can tell you that your strategy for buying and selling is a part of the investment process, but it is not the main one. Like the author, I also have hired managers to run a billion-plus dollars of money for a series of multiple manager funds. I did it for the pension division of mutual life insurer that no longer exists back in the 1990s. It was an interesting time in my career, and I never got the opportunity again. In the process, I interviewed a large number of the top long-only money managers in the US. Idea generation was the core concept for almost all of the managers. Many talked about their buy disciplines at length, but not as a concept separate from the hardest part of being a manager — finding the right assets to buy.
Sell disciplines received far less emphasis, and for most managers, were kind of an afterthought. If you have good ideas, selling assets is an easy thing — if your ideas aren’t good, it’s hard. But then you wouldn’t be getting a lot of assets to manage, so it wouldn’t matter much.
Much of the analysis of the author stems from the way he had managers run money for him — he asked them to invest on in their ten best ideas. That’s a concentrated portfolio indeed, and makes sense if you are almost certain in your analysis of the stocks that you invest in. As such, the book spends a lot of time on how the managers traded single ideas as separate from the management of the portfolio as a whole. As such, a number of examples that he brought out as bad management by one set of managers sound really bad, until you realize one thing: they were all part of a broader portfolio. As managers, they might not have made significant adjustments to a losing position because they were occupied with other more consequential positions that were doing better. After all, losses on a stock are capped at 100%, while gains are theoretically infinite. As a stock falls in price, if you don’t add to the position, the risk to the portfolio as a whole gets less and less.
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