Sell Strategies for Investment Managers: A Disciplined Approach

Knowing which stock to sell and when to sell it are difficult decisions, even for experienced investment managers. It is critical that discipline and facts, not emotion, drive the decision making process. This can be especially tricky if a position is rapidly losing value, or quickly gaining value. Exhaustive research and continual monitoring of stocks are often hallmarks of strict sell disciplines. To ensure sound decisions, many managers also employ a specific set of guidelines when considering a sale. 

Some key indications that it may be time to trim or sell an entire position include:

• The company reports unexpected negative earnings quarter over quarter or a restatement of earnings.  This reflects badly on the firm’s management team.
• There is deterioration or change in company fundamentals.  This may include:
  • A change in management or management philosophy
  • Poor cash flow
• The stock’s dividend is reduced or eliminated.
• There is a downward revision in the stock’s price.
• An unreasonable inflation of the stock’s price resulting in overvaluation.
• A lack of products in the pipeline (if a product related company).
• The stock price exceeds it target.
• Identification of a better opportunity.

Consistent implementation of a sell discipline helps to capture gains in profitable stocks, while minimizing losses associated with stocks whose prices are declining.