The Traits of Elite Investors with Lee Freeman-Shor

0:00I thought that was insane because it's like, you know, you've got guys that are billionaires, legends, you're asking them to invest in their just their 10 best ideas backed by loads of research, loads of experience. And it's worse than a toss of coins to whether they made money. And I thought I was like, wow, that's shocking. Not what the academic research would lead you to believe. So then I thought there was one in particular that every time I met him, his ideas seemed to just be crap and lose money. but when I look at his P &L in my fund he was making me the most money out of all of them so I was going hold on what's going on here this guy one in three of his ideas make money so really low hit rate what is he doing if it's not to stop people when I first started my business I remember how lonely and intimidating it was you have to wear so many hats you're having to figure everything out on your own and you're basically learning everything from scratch how I wish I had Shopify as my business partner when I first got started.

0:58Shopify is the e-commerce platform behind millions of businesses around the world. And 10 % of all e-commerce in the US comes from Shopify. Household names like Aloe Yoga, Gymshark, all the way to brands that are just getting started. You can get out the word like you have a marketing team behind you. Easily create email and social media campaigns wherever your customers are scrolling or strolling. Best yet, Shopify is your commerce expert with world-class expertise. and everything from managing inventory to international shipping to processing returns and beyond. And if you're stuck, Shopify is always around for award-winning 24-7 customer support.

1:35Start your business today with the industry's best business partner, Shopify, and start hearing. Sign up for your one-day-per-month trial today at shopify.com slash beginners. Go to shopify.com slash beginners. That's shopify.com slash beginners. This show is sponsored by Liquid IV. As we finally transition out of the indoor hibernation and start spending more time outside, staying hydrated is huge. For me, spring means I finally get to get back out on the water and spend long hours fishing. But those long, sun-drenched days require better hydration to actually enjoy them to their fullest. Liquid IV helps with that.

2:17Liquid IV helps keep you hydrated with a science-backed formula designed with an optimized ratio of electrolytes, essential vitamins, and clinically tested nutrients. And right now, you can get 20 % off your first order with code investing at checkout. Whether I'm traveling for work, spending all day casting a line, or just trying to recharge my social battery on the weekends, I know when I need hydration replenishment. And it feels great knowing Liquid IV can help boost hydration faster than water alone. It's incredibly convenient to use on the go, especially out on the boat. You literally just tear, pour, and enjoy.

2:52My go-to flavor is lemon-lime, but they also have great flavors like guava and golden cherry. Before I make any investment in the stock market, I'm always looking for the data, and it goes the same for any product I choose to use. I know I can trust Liquid IV because it's clinically tested and backed by a scientific advisory board. Real experts and real science. Just one stick and 16 ounces of water hydrates faster than water alone. Powered by LIV HydroScience, an optimized ratio of electrolytes, essential vitamins, and clinically tested nutrients that turn ordinary water into extraordinary hydration.

3:31You're getting eight essential vitamins and nutrients. It's always non-GMO, which is huge for me. Vegan, gluten-free, dairy-free, and soy-free. And if you want to skip the sugar, they have delicious sugar-free options including white peach, lemon lime, and rainbow sherbet. Liquid IV is science-backed hydration you can trust. Tear, pour, live more. Go to liquidiv.com and get 20 % off your first purchase with code INVESTING at checkout. That's 20 % off your first purchase with code INVESTING at liquidiv.com. You're tuned in to the Investing for Beginners podcast. The show for the long-term investor.

4:16We cut through the noise to focus on what works, compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. Welcome to the Investing for Beginners podcast. We have a fun show for you today. This one's a little bit different. We've got my new buddy Lee here, and we're going to talk about great investors and what makes a great investor. And hopefully we can all emulate some of the things that we learned from great investors. So Lee, thank you for joining us today. You've studied top fund managers. What led you to study them?

5:00So I actually managed a lot of top fund managers. I managed funds myself. So I was in a privileged position in that. In the UK, I managed 10 funds on a team basis. And I managed the funds in a bit of a quirky way in that I would allocate, I'd look around the world for the best investors. And then I'd say, look, I'll give you 25 to 150 million. if I thought it was good, to come and join my team. And you'll manage 25 to 150 million of my fund on my desk. And then I managed those guys. And over time, I managed over 100 of them. But what got me to research from your point of view, which led me to write my first book, The Art of Execution, was I created a fund range called Best Ideas, where the idea was you get the best investment in the world in one fund.

6:01Each of them, including me, invested in just 10 ideas, which were our very best ideas to make money. And it was based on all academic research from Harvard and One School of Economics as about why you do that. But the shocking thing was, once it was up and running, and this was, by the way, it was a very successful fund, which allowed me to retire in 2018 after 10 years of managing it. So just to put it in context, But after a few years running it, you realize that most of these guys' best ideas didn't work. And so it was actually a toss of a coin, 49 % chance of any of their ideas making money.

6:34And I thought that was insane, because it's like, you've got guys that are billionaires, legends, you're asking them to invest in their just their 10 best ideas backed by loads of research, loads of experience. And it's worse than a toss of coins to whether they made money. And I thought I was like, wow, that's shocking. Not what the academic research would lead you to believe. So then I thought, well, there's one in particular that every time I met him, his ideas seemed to just be crap and lose money. But when I look at his P &L in my fund, he was making me the most money out of all of them. So I was going, hold on, what's going on here?

7:09This guy, one in three of his ideas make money. So a really low hit rate. What is he doing if it's not the stock picking? because we're all led to believe successful investing is all about stop picking, right? But clearly, not. And so then that led me to your point, a load of research, because I had all the trading data because of my funds. And I discovered that what really mattered was what people do when they're winning and losing. So how they react, that determines their investment success. And what I discovered was successful investors, when they're losing, will join one of two tribes. So the assassins or the hunters, and the investors that were terrible joined the rabbits.

7:52And then when you're winning, would successful investors join either the connoisseurs, that tribe, or the really poor investors join the tribe of the raiders? And I can explain what each of those are. But the key thing is, depending on which one of those five tribes you join when you're winning and losing, ultimately will determine your success in investing far more than any stocks you're going to pick. And, and then I realized that I wrote a book about it. That was the first book, the Art of Execution. So, and that obviously led me to sort of quit the industry and start doing research and led to the second book, Stock Market Maestro.

8:29So that that's in a nutshell what happened. So much there. You have such an interesting story and we're definitely got to go through and talk about the archetypes. But before we do that, did you like, what was it like having to find good fund managers? I don't know if sports analogies, our audience like sports analogies. So I don't know if you felt like a baseball GM with all these prospects on the farm and it's like, oh, I just better look at a hundred and hope I get one or two superstars. Or did you build a process? Was it very intuitive? What did that look like for you? So really difficult to find great investors.

9:09There are lots of investors that you and I will see on TV that have got a brand name and you think they look successful, but if you actually analyze them and you do due diligence on them. So I was lucky. I had a team of people behind me, right? Not just me. I had quantitative analysts and qualitative analysts and myself. And so anyone we looked at, we requested their trading data, but as far back as we could go. And when you look through that lens, their ability to make money based on the decisions they make, you realize that most 90 plus percent of successful investors are just lucky in life.

9:47Got lucky, right? They're in the right trend at the right time. There's no skill there. You wouldn't hire them because their returns are not repeatable going forward. So everyone we looked at, we did years of due diligence on them. But from my perspective, particularly, I was very focused on how they, from a poker analogy, how they played the hand. So I was looking at the trading data, because everyone talks a good game. If you meet someone that's successful, clearly, they can talk and you're just super impressed, and you can be blown away by their magnificence. But when you hide the face and don't listen to what they're saying, just look at the hand and how their ideas have done and how they've made money, you realize most are just lucky.

10:31That's the process we did. We built out some tools to try to identify the really good investors. And the ones that jump through all those hoops and thresholds, they're the ones end up hiring to join me on my team. And I gave money to. But yeah, the hurdle was really high. It's really hard to find great investors. Most of the people you see on TV, I mean, some of them, quite a lot I know, obviously, personally. And someone I hear talking about various things, I sort of shake my head and go, oh, my God, I hope no one's listening to this guy because he knows nothing about that and he's he's useless but you know you hey but you know the guy i would take my hat off to him he's obviously he's been successful from luck but you know you wouldn't know that unless you analyzed all his uh trading and investments yeah no it's uh i love the trade um the poker analogy if if people out there play poker you understand you can make the dumbest choices and still win all the money so uh definitely appreciate and understand that point of view was there a certain number of years or number of trades that you felt like needed a minimum threshold for this kind of a analysis to work

11:50typically it all depends on how high turnover the manager's ideas was so if you if you've got a guy that is investing 10 20 years in an idea in an idea your sample size is quite small so as much as you can get as possible from from that guy you know as far back you know as many years or decades as possible if it's a more high turnover manager that might be you know investing in 100 names and and every year he's turning them over, so it's a new hunting thing. You can get, in terms of years, you can do with less years looking at the data, because you've got a bigger amount of sample size in terms of the investments he went into.

12:29But the short answer is, if we get everything from the guy, from the point one he's been running money, we'd do that. And if there was anyone we were looking at that we thought this person could be good, but I want to see if they've got expertise in running really concentrated 10-stock mandates, we'd get them, and we didn't mind care who it was, high profile, we'd get them to run a 10-stock paper portfolio for at least two years. And based on how they did there, looking at what they did when they were winning or losing, you know were they were they an assassin or a hunter when losing were they a console when winning depending on how they did i'd either give them money or or they'd go on to your point on the substitutes bench but when i particularly if they're operating in a similar style and place as another guy in my team you know it'd be like okay you know you passed the threshold but sorry this guy's in your space and he's really good you're gonna hold on yeah it makes sense uh so last one about this let's set the stage and then talk about the the assassins um You mentioned styles.

13:40So were you kind of just any style would work for some of the you would select as long as the person had what it takes? Or was there certain styles you tended to gravitate towards? gravitate towards? So I was trying to create a team full of individuals with very different approaches, a bit like a soccer team. I have strikers and defenders and midfields and goalkeepers. So I didn't want two guys running money the same way, same philosophical way of press, because you're just going to end up with the same stocks in your overall portfolio. So I was very conscious of making sure that each had a different philosophy and process.

14:19you know and so you'd have you know if we had 10 10 guys and me so including me running that I'm running the fund I'm managing now we'd each run money in completely different ways some more value orientated some more growthy some more large cap more small cap you know some more momentum some more contrarian all our money in different ways and the one thing they had in common, obviously, they're all successful investors, which I think says something to the audience, which is there's lots of ways to slice and dice and play the markets and make money. There's not one way. There's always one way that dominates during a certain time.

14:57If anyone had a process that led them to go in the mag seven over the last decade, they've done well. And that's stars dominated. And other people have had more, say, I would suggest that a more value-orientated approach last decade have probably struggled it doesn't mean they're bad and you don't want to put all your eggs in a basket of someone that's just full of mag seven because if that was to turn you know and go wrong you you know you'd struggle a bit makes sense makes sense cool um can we start with the rabbits that sounds funny to me uh i don't want to be a rabbit and uh so what what would classify somebody as a rabbit you said it's when somebody is losing and they behave a certain way that that's right so so when you're losing i i discovered that my my team would either fall into one of three camps so rabbit hunter or assassin a rabbit they're the people i fired they were people that when they were losing they did nothing and that's why i call them rabbits it's like they dig a hole and you know they end up losing 50%, 60%, 70%, 80 % in the names they're in.

16:08And you can probably imagine, you're digging too big a hole to get out of. When I would ask them, why have they added more money, or why have they cut the position, what's going on, they'd spin you a wonderful story, but they wouldn't want to do anything. So it's a bit like a rabbit in the headlights in that they just didn't want to move from their position. And when you understand geometry of return, so you're down 50%, you need 100 % to break even, when you're down 75%, you need 300 % to break even, you can't be a rabbit because you're never going to get out of that hole you're digging for yourself.

16:44So that's a rabbit. And I'd say a lot of the failures I saw accounted for the person being a rabbit. And it's just those handful of losers just meant the overall portfolio was not successful. So that's a rabbit. You don't want to be a rabbit. Were those tend to be more concentrated in their portfolio, or was it didn't matter what the position sizing was? So all my guys managed 10-stock portfolios, 10-stock. So they're all 10-stock. But you hit on an interesting point, actually, because a few of them, who in their day-to-day funds working for big investment shops, as well as me, in their regular fund, they'd be investing in 50 or 100 stocks.

17:34And for me, I'm saying, just from your fund, just give me the 10 best ideas investing in those kind of things. And what I found was a few of them were saying, oh, God, this is a nightmare because in my fund, this is a 1 % position, 2 % position. I don't have to think about it. It's not doing me any damage. But with me, that idea of it's down 70%, it's cost 7 % of their level, that's a big hit. So the psychology does come into it big time. You see it, and that's I write about in the book, The Auto Exclusion, that you see sunken cost bias and down bias, all these things you hear about from a behavioral finance perspective.

18:16You see it in action when you're asking a great investor to invest just in 10 names which are their best ideas, even the great ones, it turns them into jellyfish, some of them, or rabbits. And then you have to look. You may be good at running a more broad, diversified portfolio, but you're not good at making money from stock picking and executing ideas. And then you realize that that guy probably didn't have the skill set you thought when you hired him. Or phrased differently, he probably did, but the psychology and emotions, he just couldn't handle it. Whatnot is quickly becoming the next big thing for you to pay attention to.

19:02And its success isn't even slowing down over time, but it's compounding faster and faster. More and more people on this platform are making millions of dollars. and this goes from anyone small or large solo sellers or large businesses. We're all familiar with the old way of selling things. You list things one by one and you hope that the right person stumbles into the right product at the right time. Whatnot is a completely new way for this process. You sell directly to your buyers. You're able to chat live with them and answer their questions so that you make faster sales and the buyers are able to make more confident purchases.

19:35Whatnot is the largest platform of its kind. that's dedicated to this live shopping experience. And it's got hundreds of categories, everything from electronics to luxury fashion to even food. WhatNot helps build real businesses in real time through live auctions with real-time chats to make sales happen. And for a limited time, WhatNot will match your first$150 sold in the first month. Visit whatnot.com slash sell to start selling. That's W-H-A-T-N-O-T dot com slash sell. WhatNot.com slash sell. Is your wardrobe well-stocked for the upcoming season change? I'm recording, and it's the first warm day we've had in a while, and I'm realizing my wardrobe isn't as robust as it should be.

20:17So I went to Quince and got myself a three-pack of 100 % Pima cotton tees. I can't wait to report back to you about how those feel. Quince is all about premium fabrics, considered design, and everyday essentials that feel effortless to wear and dependable even as the seasons change. They are all about quality that lasts. For example, the cashmere is 100 % Mongolian, the same stuff luxury brands use. You know how much we love quality long-term investments on this show. Quince only partners with factories that meet rigorous standards for craftsmanship and ethical production. And again, this stuff looks nice.

20:51The cashmere sweater I got back in the winter just had a beautiful color on it. You could just tell it was high quality, and it looked great. Right now, go to quince.com slash beginners for free shipping and 365-day returns. That's a full year to build your wardrobe and love it. And you will. Now available in Canada too. Don't keep settling for clothes that don't last. Go to quince.com slash beginners for free shipping and 365-day returns. quince.com slash beginners. I just made a new stock the third largest position in my portfolio. And I actually just finished the deep dive report on it called the Newtonian Compounder, How 60 % Returns Power an Unstoppable Machine.

21:31It's available for our value spotlight members. If you want to see the thesis, we're doing a 60 % discount for now, but I'm pulling the deal. Once the stock hits$45, check it out at investing for beginners.com slash 60. Right. Do you have any insight into like why some people lean towards sunk cost fallacy, which if you're a beginner sunk cost fallacy is the idea that I've already I've already lost so much. Might as well just ride it out, right? Was there something you noticed or is it just like, when I see somebody do this, I'm just going to avoid it? I think we all suffer from sunk cost fallacy, sunk cost bias or endowment bias.

22:18And I think the larger the position size, the more it will impact you. So if you and I invested$50 in NVIDIA, and it went down, let's say it went down to$10, right? So if it goes down 80%, something like that, you and I would be like, I've lost$40. Now, if you and I invested$1 million in NVIDIA, and it went down to$200 ,000, you've lost $800 ,000, and I can guarantee you, you would be a rabbit. Because firstly, you've made a mistake of riding it down too far. That's the first mistake. And secondly, now you've got this, oh, my God, I've lost 800 ,000. What should I do? And your natural instinct is because this is where you're suffering from endowment bias.

23:09You see, the fact you own it, this is endowment bias, you value it more than if you didn't own it. So if you didn't own it, you might look at Nvidia and go, oh, the stock's down 80%, I can buy. Because you haven't got endowment bias. But when you've got endowed bias, you've lost that much money. You're looking at it from a different lens. You're going, oh, no. Oh, bloody hell. What should I end up going? I do nothing. I don't want to throw more money at it, because I've lost too much money. And you don't want to walk away, because you think, oh, sod's law. As soon as I sell, it'll bounce back up and go to new highs.

23:41So we're all going to suffer from sunk cost bias and endowed bias if we invest with too big position size, and we let our losers lose too much money. That's the key thing. yeah that's there's so much there that's awesome okay what about an assassin what how does this an assassin behave when they're losing an assassin as you as you might imagine from the name there's someone that kills the position when it hasn't done too much damage and i found in in the art of execution that my research showed that the really successful guys tend to kill a position when it's down somewhere between 20 and 40 percent that seems to be the sweet spot and and that makes sense intuitively from that, as I said earlier about the effect of geometry of returns.

24:26If you're down 33%, you need 50 % to break even. If you're down 25%, you need 33%. If you're down 20 or 30%, you haven't got to make too much money back to recover from that mistake. Also, I discovered that those that were assassins and they sold before they were down 20%, so say maybe they lost 10%. That's the danger. Most of those ideas, they tended to get whipsawed. In other words, as soon as they lost 10 % and get out, they're the names that just recovered. So they just came pulled by randomness and volatility and noise. So the lesson I learned there was these guys, experienced, successful investors, they realized you've got to get out of a loser before it does too much damage but you know don't don't get out too quick after five ten percent loss because you'd be likely to get whipsawed so that that was the lesson there from the assassins i've done that one too many times it is very painful to cut your losses after like losing five percent and then just that one hurts yeah it makes it makes it you're a hedge fund manager with loads of leverage you can't afford to do that but if you're like a regular guy like I guess like you and I, they just invest in stocks long only with no leverage, then yeah, this is not ideal.

25:50Okay. What's the third archetype for how somebody deals with a losing position? That's a hunter. These are rarer. These only had a handful of these on my team. These are people that when they're down, say 24%, they back up the truck and they invest a lot more capital in the idea. So it's not pound cost averaging per se. It's like, if you imagine they've gone in a position at, say, 10%, it goes down, they've lost quite a bit of money. But then they go, OK, I'm going to throw enough capital at this. I'm going to make it a 25 % position. And that's hard to do, right? Because when you're losing, psychologically, it's hurting.

26:32the stocks going against you, probably the market, Wall Street, everyone's telling you you're an idiot for going in, you're reading the research that tells you you're an idiot, and it's going to keep going down. So to actually throw a lot more cattle in the name at that point is very difficult. But I had a couple of guys that did it very successfully. And in fact, one guy was super successful for me. There was one point where he had 50 % of his sleeve in just two ideas. And he got to 50%, basically, because he was being a hunter. They were going against him, and he just built them into massive positions.

27:08And then they came good. But I'd suggest the average person, including me, is very hard to be a hunter. Because just from a psychological perspective, throwing a lot more capital at a losing idea, it's tough to live with. Because you if it keeps losing you just beat yourself up and lose love yeah oh yeah so out of those three archetypes um which ones perform the best like how do you think about once some of these in those so so what i obviously didn't want to see any rabbits they're the people they're on my team i I got rid of them. I didn't mind if someone was a hunter or an assassin, because they've proven that that approach had a value.

27:59But the majority were assassins. And to be honest with you, I think that's the easiest one to execute on. If your idea isn't working, you're down 20 to 40, at some point, you just say, okay, you know what? Either the idea is wrong, or my timing's crap, or both. So let's just cut and move on so i think um hunter assassin both work but assassin's probably the easier one for most people to implement in their own practice yeah totally all right let's talk about some winners um what were the archetypes you identified there so the winners is only two um you're going to be a connoisseur or a raider uh you don't want to be a raider um okay the There are ages of people that make 10%, 20 % profit, and then just sell and move on.

28:47If you think about what we said earlier, the chance of any idea making money is 49%. You make 20 % or whatever, and you just roll it into another idea thinking that, oh, this idea has got a better opportunity to make more money than what I've sold. My findings showed that actually, most of the time, that doesn't work. You're better off sticking where you were. And the key point I discovered, and this is what I shared in Art Execution, is just a handful of big winners make all the difference to a person's success or failure. I mean, if I was to get rid of the two or three biggest winners from the guys in my team, their returns would be very average.

29:27You need a couple of big winners. And that's what brings us to the other archetype, which is connoisseur. And a connoisseur is a person that's a bit like fine wine. he likes to ride it and win big and try to win 10x kind of thing. But that's ultimately, when you're winning, the key thing is to try to win big because you're going to have more losers than winners. So when you win, you need your winners to really pay up and cover the damage which you're going to get on your losers. Which is hard to do because you want to take action, you want to take profits, you want to feel like you're doing something to contribute to your success.