“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.

There are many reasons why this might be the case:

1. The sell discipline exists only on paper.
2. The portfolio manager tends to fall in love with certain holdings.
3. The manager waits too long for the investment thesis to pan out.
4. Idea generation is unsystematic—attractive new opportunities are not available to replace existing holdings on a timely basis.
5. 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?)”
6. Some portfolio managers equate “Tell us about your sell discipline” with “Tell us about your mistakes and process deficiencies.” (See Reasons 1-5.)
7. A sell discipline requires clear valuation assumptions.
8. Clear valuation assumptions mean price targets, which some consider rigid.
9. “Investment management is more art than science.” Translation:
10. “We have no sell discipline because we have no buy discipline.”

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.

* Based on interviews with pension fund consultants.