VALUE: After Hours (S08 E03): Rabbits, Assassins, and Hunters: How Investors Really Lose Money

During their recent episode, Taylor, Carlisle, and Ian Cassel discussed Rabbits, Assassins, and Hunters: How Investors Really Lose Money. Here’s an excerpt from the episode:

What he ended up doing was he put– In the book, he describes, these different tribes and– The people that were in the tribe of winning, he called them rabbits, assassins, or hunters. He put them in these three categories, like psychological tribes that you’re in with your winning.

And so, if you’re winning and you’re a rabbit– I’m sorry, I’m going to reframe this. Let’s go to the losing first. So, the three categories of losing are rabbit, assassin, hunter. So, if you’re a rabbit, he said this is the most dangerous category, because when a stock drops, the rabbit freezes, and it’s like a creature in headlights and they don’t do anything. Stock’s down 30%, 40%, they don’t do anything.

Jake: Shell shocked.

Ian: Yeah, exactly. They forget that a stock that goes down 50% has to go up 100% to get back to break even, let alone something that goes down 90% has to go up 900% to break even. And so, rabbits find themselves in holes, hence the name rabbit. So, that’s one category of psychological behavior that he witnessed.

Most of the investors that he invested in, he would say were assassins. They were traders. They had no emotional attachment to the companies. And so, if a stock dropped 20%, 30%, 40%, they were quick to kill the position. Just sell it. He was saying this was a good attribute to have, because you were limiting the damage, limiting the downside risk.

And then, the third one is hunter. This is the rarest breed. I think it was like 1% or 2 of the managers fell into this category. They actually were the ones that required a strong constitution and the ability to double down when the business was fine, but the stock was just dropping. One of the main takeaways was obviously that you need to be a mixture of assassin and hunter in this regard. Anyway, I was just rereading that. That was a three– And so, the two–

Tobias: Just before you move on from that, that’s not what I would have expected because I think that most people double down, don’t they? Most people keep on buying all the way down? Do you think that’s wrong? Is that characterization wrong? Do you think most people keep on buying on the way down?

Ian: It’s a good question. I do think that it’s more prevalent. People just average down just because a stock is down, not realizing that probably 80% of the time a stock’s dropping, especially if it’s not macro related, is probably because the business is deteriorating.

Tobias: Of those three options, so you can buy some more, you can ignore it and hope it recovers and just let it go to zero if it doesn’t or cut the position. I would have said cut the position’s probably– I guess it depends on the circumstances, but cut the position without knowing anything else, that’s probably the worst decision.

Ian: Yeah.

Tobias: Do nothing is probably the neutral position and buying a little bit more is probably the better decision given that you’ve done this work, you’ve done some diligence, you know something about this stock. The stock price can fall in a quarter 50% and nothing much has changed. I would have thought that blindly buying a little bit more that would have been the thing that most people do anyway and that would have been probably the better thing to do. But I don’t know, that’s an interesting finding.

Ian: Well, I think– [crosstalk]

Jake: Were there any commonalities of when you doubled down and it worked? [crosstalk] teased out of that.

Ian: He pulls in the hunter thread a little bit more. He talks about how it’s not just blindly averaging down. They were strictly tracking the business. They believe the business trajectory was the same, if not better than it was before, so it’s not just blind, you’re not buying it more because it just dropped.

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