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Art & Science Archive
Art & Science Archive
“I am rather inclined, personally, to believe that success depends on getting safely down.”
— Sir Edmund Hillary
As the first man to conquer Everest, Sir Edmund Hillary well understood the necessity for a successful round trip. Yet many portfolio managers, when describing their investment process, focus almost exclusively on their path to the summit.
The sell discipline is the most important, least well-defined step in the investment process. Because so few investment firms do a good job of defining their sell discipline, your firm can stand out from the crowd by telling a strong sell discipline story.
- The sell discipline exists only on paper.
- The portfolio manager tends to fall in love with certain holdings.
- The manager waits too long for the investment thesis to pan out.
- Idea generation is unsystematic—attractive new opportunities are not available to replace existing holdings on a timely basis.
- The closet index phenomenon: too many holdings with too little coverage means that (whoops!) “We should have sold XYZ Company a long time ago (What does XYZ do again?)”
- Some portfolio managers equate “Tell us about your sell discipline” with “Tell us about your mistakes and process deficiencies.” (See Reasons 1-5.)
- A sell discipline requires clear valuation assumptions.
- Clear valuation assumptions mean price targets, which some consider rigid.
- “Investment management is more art than science.” Translation:
- “We have no sell discipline because we have no buy discipline.”
Based on interviews with pension fund consultants.