Oliva Partners Management, LLC

Value investing is a time-honored strategy where investors look for securities that appear underpriced by some form of fundamental analysis. As the name suggests, it’s about finding true value that the majority has yet to recognize and buying at a price perceived as a bargain. 

This investment approach, popularized by Benjamin Graham and Warren Buffett, requires a deep understanding of the market, a keen eye for undervalued stocks, and the patience to wait for the market to realize the true value of these investments.

But identifying undervalued stocks is just one part of the equation. The actual purchase and sale of these stocks — trade execution — plays a critical role in the overall performance of a value investing strategy. 

Trade execution encompasses not just the act of buying or selling but also the timing of these trades and the size of the positions taken. These factors can significantly influence an investment portfolio’s potential returns and risk profile.

Position sizing refers to the allocation of capital to a particular investment in relation to the total portfolio. Getting it right can mean the difference between moderate success and outstanding performance. Conversely, poor position sizing can lead to unnecessary risk exposure and potential underperformance.

Timing, while often debated in its relevance to value investing, cannot be ignored. The entry point of an investment can greatly affect the return on investment, especially in the short term. Similarly, the exit timing can determine the actual gains or losses realized, regardless of the intrinsic value of the asset.

In this article, we’ll examine the pillars of trade execution, position sizing, and timing, and how they interplay with the principles of value investing to affect investment performance. 

The 10 Pillars of Trade Execution

Trade execution is the mechanism through which securities are bought and sold in the market, and it’s a process that can be as complex as the strategies behind choosing what to buy and sell. 

For value investors, trade execution is not about high-frequency trading or timing the market to the second, but it is about understanding the mechanics that can make or break the success of an investment. 

Trade execution is a critical aspect of the investment process, and ten key pillars underpin its effectiveness:

Price – Achieving the best possible price for a trade is fundamental to successful trade execution. This involves understanding the market conditions and how they can affect the price at which a trade is executed.

Speed – The speed at which trades are executed can be crucial, especially in fast-moving markets. Rapid execution can prevent slippage and ensure that the trade reflects the investor’s strategy and market conditions at the time the decision is made.

Liquidity – Liquidity refers to the ability to quickly buy or sell assets in the market without causing a significant change in the asset’s price. High liquidity facilitates easier trade execution at predictable prices.

Cost – Keeping transaction costs low is vital to maintaining the profitability of an investment strategy. This includes not only the fees and commissions but also the potential costs associated with slippage.

Consistency – Consistent trade execution ensures that an investment strategy is applied systematically and reliably over time, which is important for achieving long-term investment objectives.

Fairness and Compliance – Trades must be executed in a manner that is fair to all market participants and in compliance with regulatory requirements. This includes avoiding practices like front-running or market manipulation.

Transparency – Transparency in trade execution allows investors to understand how and why their trades were executed in a certain way, which is important for trust and ongoing strategy refinement.

Technology and Infrastructure – Robust technology and infrastructure are necessary to facilitate efficient and accurate trade execution. This includes trading platforms, algorithms, and connectivity to various exchanges and dark pools.

Risk Management – Effective trade execution must consider the risk associated with the trade itself and the broader impact on the portfolio. This involves understanding the potential for adverse price movements and using strategies to mitigate this risk.

Market Impact – Minimizing the market impact of trades, especially large orders, is crucial to avoid moving the market price unfavorably before the trade is completed.

By understanding these pillars, value investors can develop a strategy to execute trades in a way that not only captures the intrinsic value of the securities but also contributes positively to the overall investment performance.


Components of a Trade Execution Strategy

Developing a comprehensive execution strategy is a multifaceted endeavor that integrates the pillars of trade execution, a deep understanding of market dynamics, and a meticulous approach to trade planning. 

  • Thorough market analysis forms the basis of a solid execution strategy, with a focus on liquidity to gauge the ability to buy or sell a security without causing significant price movement — a crucial factor in maintaining the integrity of a value investment’s entry and exit points.
  • Choice of execution venues is equally important; selecting platforms and brokers that not only align with value investing principles but also offer the most favorable terms is essential for effective trade execution. 
  • Understanding and managing transaction costs is also critical since excessive fees can quickly erode investment returns. 
  • An in-depth understanding of order types and execution tactics is necessary to leverage technology effectively, allowing for the precise timing and sizing of orders to optimize execution. 
  • The ability to monitor and adapt in real-time, staying abreast of market conditions to adjust execution strategies as needed. 
  • Post-trade analysis provides a feedback loop for refining future strategies by reviewing the performance of past trade executions. 

Together, these components form the bedrock of a robust execution strategy that can significantly enhance the performance of a value investing portfolio.

How Trade Execution Influences Investment Outcomes

Effective trade execution can significantly influence the performance of a value investing portfolio. This influence extends beyond the immediate financial impact to the more subtle effects on investor psychology and market perception.

Financial Implications

  • Price impact: the timing and size of orders can move the market and affect the entry or exit price.
  • Opportunity cost: missed opportunities have a specific cost when execution is delayed or poorly timed.


Strategic Implications

  • Alignment with investment strategy: ensure that the execution of trades is in harmony with the long-term value investing approach.
  • Portfolio balance: execute trades in a way that maintains the desired portfolio diversification and risk profile.


Psychological Implications

  • Investor confidence: trade execution has an impact on an investor’s confidence in their overall investment strategy.
  • Market sentiment: the execution of large trades can signal market sentiment and influence other market participants.


The influence of trade execution on investment outcomes cannot be overstated. Even with the most thorough analysis and the best value picks, poor execution can erode potential gains as well as investor confidence and market sentiment.


Position Sizing in Value Investing

Position sizing determines how much capital to allocate to a specific investment. It’s a strategic decision that can significantly influence the risk and return profile of an investor’s holdings. 

The Concept of Position Sizing in Action

  • Example of Position Sizing Impact: If you have a portfolio of $100,000 and you allocate $10,000 to a stock that increases by 10%, your portfolio gains 1% overall. If you had allocated $20,000 to the same stock, your portfolio would have gained 2%. At the same time, your loss potential increases in the same way. This simple example shows how position size directly affects the contribution of an individual investment to the overall portfolio performance.
  • Risk-Reward Balance Example: Risk-Reward Balance Example: Consider two stocks, Stock A, with high volatility but high potential returns, and Stock B, with low volatility and moderate returns. You might allocate 5% of your portfolio to Stock A due to its higher risk while allocating 10% to Stock B, which you perceive as more stable.


Strategies for Effective Position Sizing

  • The Kelly Criterion guides investors on the proportion of capital to allocate to an investment based on its expected return and odds of success. 
    • For example, if an investment has a 60% chance of success and the payoff is 2:1, the Kelly Criterion would suggest investing 20% of the portfolio (calculated as 0.6 – (1 – 0.6) / 2). This formula helps to prevent overbetting and underbetting.
  • Equal vs. Value Weighting evaluates the benefits and drawbacks of equal weighting versus value weighting within a value investing framework.
    • In an equal-weighted portfolio, each stock represents an equal portion of the portfolio. For example, if you hold 20 stocks in your portfolio, each stock would represent 5% of the total.
    • In a value-weighted portfolio, you might allocate more to those stocks you believe will have a higher intrinsic value. For example, 10% to Stock C if you feel it’s undervalued, while only 2% to Stock D if it seems fairly valued.


Position Sizing and Risk Management

  • Diversification Through Position Sizing examines how position sizing contributes to the diversification of a portfolio and what this means for managing overall investment risk.
    • For example, you might limit position sizes in riskier sectors, such as technology, to 2% of the portfolio, while allowing for larger positions in traditionally stable sectors, like utilities, up to 5%.
  • Drawdown Mitigation: During a market downturn, smaller-sized positions may experience less portfolio drawdown than larger position sizes. Conservative position sizing helps to cushion the portfolio against market volatility.


Position sizing is a deliberate approach that requires careful consideration of each investment’s potential impact on the portfolio. It’s not merely about how much an investor can afford to invest but also about how much they should invest based on the risk profile of the stock and the desired portfolio outcome. 

The next sections will explore how timing and trade execution can be optimized in conjunction with position sizing to further refine a value investing strategy.


The Art of Timing in Value Investing

Timing in investing often conjures images of traders attempting to buy low and sell high on a daily basis. 

For value investors, timing is an exercise in strategic patience and discipline. It’s about making informed decisions that are grounded in fundamental analysis and a clear understanding of economic cycles. 

This section will explore the importance of timing in value investing and how it can be effectively incorporated into a long-term strategy.

Timing the Market: Myth vs. Reality

  • Debunking Market Timing Myths: The idea that market timing is irrelevant for value investors is a common misconception. Judicious timing can still play a critical role in buying undervalued stocks or selling when the market offers a premium.
  • The Reality of Market Cycles: Value investors can use market cycles to their advantage by identifying phases where value stocks are more likely to be undervalued. 


The Role of Market Cycles in Timing

  • Spotting Market Bottoms: The greatest value investment opportunities often lie in market bottoms. Various data points, including economic indicators, market sentiment, and valuation metrics, can help value investors identify potential market bottoms where undervalued stocks are more prevalent. 
  • Recognizing Market Tops: Similarly, there are warning signs that can indicate a market top, such as overly optimistic valuation metrics or high levels of investor leverage, which could suggest that value stocks are becoming overpriced.


Entry and Exit Strategies for Value Investors

  • Entry Strategy: Value investors should develop a set of criteria, including fundamental analysis, to determine the right time to buy into a stock that is trading below its intrinsic value.
  • Exit Strategy: Likewise, value investors should decide when to sell, which could be triggered by the stock reaching its calculated intrinsic value, a fundamental change in the company’s prospects, or a shift in market dynamics

Timing is a nuanced art in the context of value investing. It requires patience, discipline, and a contrarian mindset to go against the herd when the market misprices securities. 

The next sections will delve deeper into the specifics of how trade execution and position sizing can be synchronized to create a robust framework for value investing success.


Direct Impacts of Trade Execution

The execution of trades is a pivotal moment in the investment process, where planning and strategy meet the real-world test of market conditions. The nuances of trade execution can significantly influence the performance of a value investing strategy.

The Impact of Slippage

Price slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. It can occur at any time but is more common during periods of high volatility when market prices are moving rapidly, or when large orders are placed that cannot be filled at the current quoted price due to insufficient liquidity.

In the context of value investing, slippage can affect investment returns in several ways:

  1. Entry Price Slippage: When an investor places an order to buy a stock, they may have a specific price in mind, based on their valuation analysis. If the market is moving quickly or if the stock is not heavily traded (low liquidity), the actual purchase price may be higher than anticipated. This means the investor starts with a small loss right from the beginning, as they’ve paid more for the stock than intended
  2. Exit Price Slippage: Similarly, when selling a stock, an investor might expect to receive a certain price based on current market quotes. However, if the market price drops as they are selling (especially in the case of large orders), the actual sale price may be lower than expected, reducing the realized gains or increasing losses.
  3. Impact on Stop Orders: Investors often use stop-loss orders to limit potential losses. Slippage can cause the stop-loss order to execute at a less favorable price than set, leading to larger-than-expected losses.
  4. Market Gaps: Slippage can also occur when the market price gaps significantly from one level to another without trades occurring in between. This often happens outside of regular trading hours when news or events affect the stock price.

For value investors, who typically operate with a long-term perspective and may deal in less liquid, undervalued stocks, understanding and managing slippage is crucial to maintaining the integrity of their investment strategy and ensuring that they do not erode their margins of safety.

Mastering Order Types for Optimal Execution

Value investors can strategically use different order types to control the prices at which they buy and sell, thus protecting against adverse price movements and enhancing returns.

Here’s a rundown of common order types and how they can be used:

Market Orders: A market order is an instruction to buy or sell a security immediately at the best available current price. It is executed quickly, but there is no price guarantee, which can lead to slippage in fast-moving or thinly traded markets.

Limit Orders: A limit order specifies the maximum price the investor is willing to pay for a buy, or the minimum price they are willing to accept for a sell. It guarantees price but not execution; if the market doesn’t reach the limit price, the order may not be filled.

Stop Orders (Stop-Loss Orders): A stop order, also known as a stop-loss order, is set to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, the stop order becomes a market order. This can protect against significant losses, but it does not guarantee the stop price due to potential slippage.

Stop-Limit Orders: A stop-limit order combines the features of a stop order and a limit order. Once the stop price is reached, the trade turns into a limit order and will only be executed at a specified price or better. This can prevent slippage but may result in the order not being filled if the price moves away from the limit price.

Trailing Stop Orders: A trailing stop order sets the stop price at a fixed amount or percentage below the market price with an attached “trailing” amount. As the price goes up, the trailing stop rises with it, thus securing profits. If the price falls, the stop-loss price doesn’t change, and a market order is triggered at the stop price.

Good-Till-Canceled (GTC) Orders: This type of order remains active until the investor cancels it or the trade is executed. It can be applied to both limit and stop orders, providing control over the timing of the trade.

Day Orders: An order to buy or sell that automatically expires if not executed on the day the order was placed.

All-or-None (AON) Orders: This order type specifies that the order must be filled in its entirety or not at all, which is useful for investors who don’t want partial fills.

Iceberg Orders: Large orders can be broken down into smaller lots, known as “iceberg” orders, to hide the actual order quantity and minimize price impact.

Value investors can use these different order types to control the prices at which they buy and sell securities, thus managing the costs of trade execution. Limit orders and stop-limit orders can protect against slippage, while market orders ensure execution but at the risk of paying a higher or receiving a lower price than expected. The choice of order type depends on the investor’s priorities for price versus execution certainty.


Case Studies: Trade Execution Successes and Failures

Real-world examples of value investors benefiting from well-timed and well-executed trades are numerous, but they often share common themes of patience, deep analysis, and a clear understanding of market dynamics.

Successful Executions

Warren Buffett’s Investment in Goldman Sachs During the 2008 Financial Crisis

In the midst of the 2008 financial crisis, Warren Buffett’s Berkshire Hathaway purchased $5 billion in Goldman Sachs preferred stock. Buffett’s timing was critical; he made the investment after stock prices had plummeted but before the market began to recover. 

The terms of the deal included a 10% dividend and the option to buy an additional $5 billion in stock at a set price. The trade execution was optimal, as it provided Buffett with a high yield and potential for significant capital gains, which materialized when Goldman’s stock price rebounded.

Seth Klarman’s Purchase of Distressed Assets During the Early 1990s

Seth Klarman, the president of The Baupost Group, is known for purchasing distressed assets that are out of favor with investors. In the early 1990s, during the savings and loan crisis, 

Klarman bought up beaten-down bonds and bank debt. By executing trades at a fraction of the bonds’ face values, Klarman positioned his fund to benefit from eventual recoveries in these securities, leading to substantial returns for his investors.

Michael Burry’s Bet Against the Housing Market

Michael Burry, the founder of Scion Capital, identified a bubble in the US housing market in the mid-2000s. He used credit default swaps to bet against the subprime mortgage market. His timing was impeccable, as he recognized the signs of the bubble well before it burst. 

Burry’s execution of this strategy was complex and required significant negotiation with banks to structure these trades, but it paid off handsomely when the market collapsed, and the value of his positions soared.

Howard Marks’ Opportunistic Buying During the Dotcom Crash

Howard Marks, co-founder of Oaktree Capital Management, is known for his contrarian and cyclical approach to investing. After the dotcom bubble burst in the early 2000s, Marks began buying high-yield bonds and distressed debt, which many investors were avoiding. 

By executing trades in a market that was largely out of favor, Marks secured high potential returns at discounted prices. As the market eventually stabilized and recovered, these investments generated significant gains.

These examples demonstrate how value investors can benefit from well-timed and well-executed trades. A combination of market understanding, patience, and strategic execution can lead to enhanced portfolio returns, even in times of market stress or volatility. Each of these investors had a clear strategy and executed their trades in a way that maximized the value of their investment thesis.

Execution Mishaps

Real-world examples of poor trade execution leading to losses or missed opportunities are often less publicized than success stories. Investors and firms tend to keep such details private. 

Even seasoned investors have faced challenges due to execution missteps:

Knight Capital Group’s Trading Glitch

In 2012, Knight Capital Group, a leading American global financial services firm, experienced a devastating software glitch related to the execution of trades. The faulty deployment of new trading software caused a flood of erroneous orders in the market, resulting in a loss of $440 million within just 45 minutes. 

This example underscores the importance of proper trade execution systems and the potentially catastrophic impact of their failure.

Long-Term Capital Management (LTCM) Liquidity Crisis

LTCM was a hedge fund management firm that famously collapsed in the late 1990s. Despite the sound investment theses and the involvement of Nobel Prize-winning economists, LTCM’s high leverage and the assumption that markets would remain liquid led to its downfall. 

When Russia defaulted on its debt, market conditions changed drastically, and LTCM’s positions became highly illiquid. The firm was unable to execute trades to unwind positions without incurring massive losses, leading to a significant financial crisis that required a Federal Reserve-orchestrated bailout.

Bill Ackman’s Investment in Valeant Pharmaceuticals

Bill Ackman’s Pershing Square Capital Management took a significant position in Valeant Pharmaceuticals, a company that later faced intense scrutiny over its business practices and pricing strategies. 

Ackman believed in the fundamental value of the company, but as negative news emerged and the stock price plummeted, the fund’s large position became a liability. The inability to exit the position in a deteriorating market without further driving down the price resulted in substantial losses for the fund.

Quant Fund Struggles During the Quant Quake

In August 2007, a period known as the “Quant Quake” saw many quantitative long/short equity funds experience sudden and sharp losses. These funds used algorithms that, in some cases, failed to account for changing market dynamics and liquidity conditions. 

As many funds were following similar strategies, the need to liquidate positions in a declining market led to a cascade of sell orders that further depressed prices, exacerbating losses due to poor execution strategies.

These examples highlight the importance of considering market liquidity, the impact of large orders, the reliability of trading systems, and the need for robust risk management practices. They serve as cautionary tales for investors at all levels, emphasizing that even a sound investment thesis can be undermined by poor trade execution.

Effective trade execution is not just about the act of buying or selling securities; it’s about making those transactions in the most efficient and cost-effective manner possible. For the value investor, this means being mindful of the market conditions, understanding the mechanics of different order types, and executing trades that align with the overarching investment strategy. 


Optimizing Trade Execution for Enhanced Performance

Optimizing trade execution is a dynamic process that can significantly enhance the performance of a value investing strategy. 

Continuous Improvement in Trade Execution

Assessment and Analysis: Regularly reviewing past trades to assess execution quality, including timing, price, and fees, can provide valuable insights. This involves analyzing whether the intended strategy was effectively implemented and identifying any deviations from the plan.

Technology and Tools: Staying abreast of advancements in trading technology can help investors execute trades more efficiently. This includes using algorithmic trading systems that can automatically execute trades based on predefined criteria, reducing the likelihood of human error and emotional bias.

Broker and Execution Venue Selection: Choosing the right broker and execution venue is crucial. Value investors should consider factors such as commission rates, execution speed, and the ability to handle large orders without causing market impact.

Training and Expertise: Continuous education on market trends and execution strategies can improve decision-making. This may involve formal training or learning from experienced traders and portfolio managers.

Adaptation to Market Changes: Markets are constantly evolving, and trade execution strategies must adapt accordingly. This includes understanding and adjusting to changes in market liquidity, volatility, and regulations.


Hypothetical Case Study: Optimizing Trade Execution in Practice

Background: Let’s say you’ve identified a mid-cap company as undervalued based on its fundamentals. You decide to build a significant position in the company, aiming to capitalize on the expected upward price correction.

Challenge: The stock is not widely traded, which means large orders could significantly move the market price, leading to slippage. You need to accumulate shares without alerting the market to avoid driving up the price.

Solution: You use a combination of limit orders and iceberg orders to purchase shares over time. By breaking down the large order into smaller, less noticeable orders, you minimize market impact. Additionally, you use a trading algorithm designed to adapt to changing market conditions, executing orders at times of higher liquidity to get the best prices.

Outcome: You successfully accumulate the desired position at an average price that is close to the initial valuation. Your careful execution strategy prevents substantial slippage and preserves the investment’s potential upside.

Optimizing trade execution is an ongoing process that requires a combination of market knowledge, the right technology, and a willingness to adapt to changing conditions. By focusing on continuous improvement, value investors can enhance their ability to execute trades that align with their investment thesis and maximize returns.


Conclusion: Synthesizing Trade Execution with Value Investing

Trade execution plays a pivotal yet often understated role in value investing, where the focus is on long-term gains and intrinsic value. The synthesis of meticulous trade execution with the principles of value investing can significantly amplify investment outcomes. 

5 Best Practices for Value Investors

  1. Conduct Thorough Research and Plan: Before executing any trade, conduct comprehensive research and have a clear plan that includes entry and exit strategies based on the company’s fundamentals and valuation.
  2. Use Precision in Order Placement: Utilize limit orders to help buy or sell at predetermined prices and maintain control over the price aspect of trade execution.
  3. Monitoring Market Conditions: Stay informed about market liquidity and volatility to choose the best times to execute trades, reduce slippage and market impact.
  4. Leverage Technology: Implement advanced trading platforms and algorithms can aid in executing complex trading strategies, managing risks, and improving overall efficiency.
  5. Continuous Education: Stay abreast of new regulations, market tools, and trading strategies is essential for value investors to refine their trade execution processes continually.


The Road Ahead for Value Investors in Trade Execution

As financial markets become more complex and interconnected, value investors will need to adapt their trade execution strategies to new market realities, including the increasing prevalence of algorithmic trading and machine learning models.

Value investors must also stay informed about regulatory changes to ensure compliance and optimize trade execution within new frameworks.

The future may bring more collaborative trading platforms that allow value investors to share insights and strategies, potentially reducing costs and improving execution through pooled knowledge and resources.

In conclusion, trade execution is an essential component of the value investing equation, directly affecting the risk and return profile of investments. Investors who can skillfully integrate solid trade execution with sound value investing principles have a competitive advantage.


Discussion Questions

  1. How do you manage trade execution?

  2. Have you developed a strategy that has a positive impact on overall performance?

  3. What challenges have you faced and overcome with trade execution?

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