Thomas Edison said “Vision without execution is hallucination.” Real estate experts love to claim that success is based on “location, location, location.” For his recent book, The Art of Execution (Harriman House 2015), Lee Freeman-Shor analyzed over 30,000 trades by 45 professional investors and concluded that success in the stock market comes down to “execution, execution, execution.”
Freeman-Shor groups investors into five tribes – Rabbits and Raiders whose behaviors put them on the losing side, and Assassins, Hunters and Connoisseurs who are winning tribes due to superior behaviors and strategies.
It all comes back to the challenge that emotions drive the investment decisions of both professionals and individual investors. I wholeheartedly agree with one of his conclusions that states “before you invest in an idea, you have to have a predefined plan of action that will govern your actions after the initial investment, and you have to have the discipline to stick to it.”
In my own Tensile Trading methodology, I endeavor to achieve these objectives by planning both bullish and bearish scenarios for all my trades, thereby being prepared to execute whichever strategy the market tells me is required. The second part of my approach is to religiously adopt a discipline of pyramiding into a position in tranches. In other words, I never take a 100% position on the first trade when I buy into an equity. Depending on market circumstances and the relative strength of the sector, industry and equity I’m buying, I will enter with perhaps 30% of my position, set my stops and then wait for the market to move up and prove me right before buying more.
Similarly, on the sell side, I’ve had past trades where I have exited 50% of my position following my more aggressive pyramiding-out strategy, only to have the market prove me wrong and the remaining 50% of my position goes on to double in value. What Lee Freeman-Shor’s analysis of those 30,874 trades found parallels very closely the Tensile Trading methodology and reinforces my own experiences as a trader.
It’s a simplification to claim that the winning and losing behaviors of his five tribes can be boiled down to bullish and bearish scenarios and pyramid buying and selling disciplines, but his study definitely strengthened my own resolve in these areas. A primary objective always must be the protection of capital. Without capital, future opportunities will walk right by you.
Another primary objective is to stay disciplined. Planning multiple scenarios before you trade and using the power of probabilities to pyramid into and out of positions is a time-tested strategy that is backed by the analysis of these 30,874 trades.
Final note: This blog is dedicated to the special memory of my dear friend Thomas S. James, Jr. who died tragically in an auto accident this past weekend. He reminded me that the loss of the friends and family you love is the only loss that truly matters.
Trade well; trade with discipline!
-- Gatis Roze, MBA, CMT
Presenter of the Tensile Trading DVD, Stock Market Mastery.
Developer of the StockCharts.com Tensile Trading ChartPack.
P.S. Click HERE for information on my future appearances & seminars.