Analyzing the Decision Making of the World’s Best Investors

The chance of a top investor’s idea making money is 49%. Let me rephrase that so the message hits home: when a top investor picks a stock to invest in, 51% of the time they will lose money. 

Lee Freeman-Shor arrived at this finding by analyzing the top ideas of the world’s best investors, including legendary billionaire hedge fund managers. That discovery shocked, but fascinated him because despite being wrong most of the time, most of them made a lot of money. 

When you realize it’s a toss of a coin whether you make money on a stock, and that’s the average of the best investors in the world. Then it hits you what matters most is how you react when you are winning and losing. 

He wrote about his findings in his first book, The Art of Execution. I wrote about the book here. 

Shor said the response to the book was overwhelming, but readers wanted to know how to put the lessons learned into practice. He thought a book featuring quantifiably verified Stock Market Maestros would do the trick. 

In a new book, Stock Market Maestros, co-authors Lee Freeman-Shor and Clare Flynn Levy analyze the decision making of the world’s best investors. 

The 12 Stock Market Maestros interviewed in the book weren’t picked randomly.  Shor and Levy started with a universe of tens of thousands of public equity mutual funds and active ETFs, and narrowed it down to a shortlist comprised of: 

• Morningstar, Lipper, FE Fund Info and Morningstar award winners
• Equity mutual funds listed on Morningstar with high three-year Sharpe, Sortino and Upside/Downside Capture Ratios
• Funds already in the Essentia Analytics database exhibiting strong decision stats. 

73 funds made the shortlist. Then they narrowed the list down to 12 stock market maestros based on three long-term and short-term measures. 

Behavioral Alpha Score (BA) – proprietary patent pending measure of investor decision-making skill developed by Essentia Analytics. It looks at the last three years of trading history and measures whether the investor has been making skilled decisions RECENTLY. That’s important as just because someone was making good (or bad) decisions 10 years ago, doesn’t mean they are still doing so now. BA analyzes 7 critical decision types – Picking, Sizing, Entry timing, Scaling in, Size Adjusting, Scaling out, Exit Timing. A BA score >50 is 1.5x as likely to outperform in the next year as an investor with a BA Score <50.

Hit Rate - The percentage of all positions in the portfolio that generated a positive return during the portion of the period they were held. 

Payoff Ratio – taking the P&L generated by the average good idea or decision and dividing it by the P&L generated by the average bad idea or decision - How much more are you making from your winners than losing from your losers? 

Neither the Maestros nor the shortlist had a median hit rate >50%, but the Maestros scored significantly higher than the rest of the shortlist on all three measures, most notably on Behavioral Alpha Score and payoff ratio. 

Each chapter of the book features a conversation with a real Stock Market Maestro from the United States, Europe, or Asia. Each Maestro explains their strategy, decision making, and real examples of what they do when they are winning and losing. 

Below is a sample chapter.

Buy the book!

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