This was a serious mistake and is probably the most important takeaway from the book. Yet the majority did not buy materially more shares. The author points out that his investors generally remained optimistic in the face of a losing position, insisting that the fundamentals had not changed. I suspect hunters would have been the rarest tribe, but unfortunately the book does not go into those details.
I was curious as to how many of the group fell into the different categories. Conversely, they were not afraid to sell if they realised they had made a mistake – this combination of selling the mistakes and doubling up on the winners is a sign of a superior investor. But if they didn’t get this right, they were not afraid to increase their position, doubling or trebling their commitment. The author suggests that many of these investors were adept at using charts to finesse their entry points and picking the bottom. Many were value investors and were buying out of favour stocks, so they understood that the price might well go against them.
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These investors practised dollar cost averaging and didn’t put a full position on straightaway. Interestingly, they planned beforehand to buy more shares if the price fell. This tribe averages down on losing positions. But this is probably the most common way private investors lose money. I don’t know if it’s fear of the unknown, loss aversion, or some other bias. So in their mind, it was better to stick with a loss-making position than risk this. The author attributes this attitude to fear of the unknown – if they sold, the shares might rally.
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This is certainly the correct strategy for a loss-making position, and one which should be easier for the professional investor to adopt than the private investor, who usually has less practice. Freeman-Shor wanted them to review the positions dispassionately, and either average down or sell. They failed to cut these positions in a timely manner, even when their thesis changed and often continued to look at the stocks through the lens at the time of purchase. Perhaps hoping for a recovery to their purchase price. Some of the most prestigious names on the street bought stocks, watched them go down, and did nothing. This was the tribe of losers, unfortunately for the author, as on average he allocated over $50m to each of them.
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