avalok wrote: ↑Wed Sep 28, 2022 4:23 am
There must be a weighting toward edge though. That edge must count for more than execution...
Over time I've come to agree with the importance of execution over/equal to "edge" more and more. It seems like having an edge would make the whole thing simple, but that's not the case in my experience.
It's like this. You find an asset that is cheap. Great. You'd think it would be as simple as buying it, waiting for it to go up, and then selling as it approaches or exceeds fair value.
In reality, though, managing a portfolio is often not like this. You're going along doing research and find something you really like, trading at 50% of value, which gets you excited (i.e. greedy). However, you don't have meaningful cash, so to buy something new, you have to sell something else (that you were previously just as excited about, maybe trading at 80% of value now). Say the thing you sold runs another 15% up and the thing you buy falls 15% down and takes a year to get back to the purchase level before going on to perform well. You could be right, but the execution of your exit/entry has a material impact on your actual performance. Rather than letting your initial idea play out, you prematurely ended the trade because you got excited about the cheaper stock.
Consider a counterfactual where you held your original stock for another 6 months, it went up 10%, and then you sold to buy the new stock that went down another 10%. You've now realized a larger profit, can roll that larger profit into a now-cheaper stock, and you've cut out 6 months of the flat time of the new purchase. I've had this situation play out time and time again.
It is fairly common that value investors sell assets too soon (i.e. they keep going up post-sale) and buy assets too early (they keep going down post-purchase). I'd say this is an execution mistake. I've always done fairly well at identifying cheap stocks, but less well at optimizing the trading element. Focusing on correcting this mistake has yielded greater returns for me than finding cheaper stocks.
If you read books like
Market Wizards you'll see this idea pop up, too, in types of investing/trading other than value investing. Someone has a good strategy, but doesn't execute it well as they get swept up by emotion and alter the approach.
It sounds like an odd thing when you're starting out as you think it's just a matter of finding "the right approach". But you come to see it's as much about consistently executing a solid approach as it is finding the "best" approach.
Livermore's quote encapsulates this idea well with respect to my own mistakes:
“Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”
To generalize this quote, we could say:
"Individuals who can identify alpha-producing strategies and strictly adhere to them are uncommon...It is literally true that larger profits come easier to an investor who strictly follows a sound strategy rather than hopscotching around all the time to the whims of their emotions."