What’s Your Sell Discipline?

February 15, 2008

In this difficult economic time, one of the most important thing on the minds of investors is: when do I sell? We spoke with several portfolio managers this week who talked to us a little bit about when they decide to sell.

John Lemry, Emerson Investment Management (Large Cap Growth):

Mr. Lemry: If a company has underperformed the S&P 500 by 20%, our discipline requires us to review the holding, examine the thesis for owning the stock and make a case for continuing to hold the position. The decision to sell is not a rote decision, but unless the whole sector or industry is down, such as financials today, we will typically look for a good exit point. Examples of sales triggered by this process in 2007 were Genworth (GNW) and Kohl’s (KSS).Conversely, when stocks do very well and exceed their intrinsic values, we are also sellers. An example was Ambac, which hit our price target last year and we exited at $88. That was a particularly good sale for us as the stock is now trading at less than $12 per share.

John Kattar, Eastern Investment Advisors (Separate Account, Sector Specific) 

Mr. Kattar: The sell process is the opposite of the buy process. I mentioned before that we have three parts to our process: top-down, quantitative, and bottom-up, which is really the core of what we do. We are very conservative managers, so stocks have to score well on each of those three disciplines in order to find their way into the portfolio. In other words, it has to fit our macro themes, has to look good on our quantitative models and also has to be validated by our bottom-up inputs. In order for a stock to be sold, it only has to run afoul of one of those disciplines. The idea is that we don’t mind missing a very good stock because we have been too conservative — there are always other stocks to buy — but we do not want to hold a bad stock because we weren’t conservative enough.

Jason Beckman, The Oxford Private Client Group (Top-Down, Equity and Fixed Income)

Mr. Beckman: We have a different discipline depending on whether the target is on the way up or on the way down. When we take a position, we will set a sell target on the way up technically. When we buy a stock at $30, we’ll set our target at, say, $39; that is a 30% return. When it hits $39, pretty much regardless of what happens, we will sell the position, period. On the way down, however, we will take a little different approach. It is not so much technically driven as it is fundamentally driven. If we buy the same stock at $30, we’ve done our due diligence and we believe that is a good place to purchase the stock. But also understand that we don’t go all in. If we are going to take, let’s say, a 4% position in a $30 stock, we are not going to take a 4% position on day one. We are going to work our position in over maybe four or five increments, so 1% or less on every placement.

For the complete investment strategies report, including full interviews with each of these portfolio managers and others, click here.