As we walked back from lunch and stood outside the office building talking, I realized I had but a moment to say it.  It was November 2012 and one of our research clients was about to return to his office. “Joe,” I began.  “One last thing, I think you should sell Apple.” “WHAT!” he responded?  

The stock had been going up virtually in a straight line for four years.  But it was just starting to break through its 200-day moving average on an absolute and relative basis (underperforming the market).  Fortunately, the client was quite familiar with our methodology.   And he was one of the best money managers ever ... and definitely one of the richest.  In fact, Apple was his largest holding.  The stock had driven his hedge fund, at that point in early November, up 35%.  And here I was suggesting he sell it!  The stock at the time was $600, down from a high of just over $700.  Wall Street overwhelmingly loved Apple and continued to recommend it as a strong buy. 

Ironically, I had learned the importance of having a sell discipline from my client’s former business partner, Roland Grimm.  Roland had been the portfolio manager of Fidelity’s Trend Fund in the late 1950s and early 1960s.  It was some time in the late 1990s when Roland called me for lunch.  At that time most active managers were not beating the S&P 500.  I had brought a list of possible reasons for that to our lunch and presented it to Roland.  He looked at the list and then said, “You don’t have the most important reason, a sell discipline.” It was the boom time of the Internet.  Who needed a sell discipline? I thought.  But I wrote it down… out of politeness.  But in the bear market of 2000 I pulled it out and made it the number one reason on my list.  It is absolutely the key to long-term performance.

The reason goes to what John Bogle of Vanguard Mutual Funds once described as, “the insidious math of portfolio management.” Very simply, if a stock declines 50% you have to find another that will go up 100% just to break even!  Try doing that, even in a bull market.  Notwithstanding its importance, there are few research firms that will give sell advice.  And, more surprisingly, few investment management firms actually have a structured sell discipline. 

To not have a sell discipline is to ignore its importance.  Markets are about price discovery.  At a given moment, what is something worth?  But not all buyers and sellers are equal.  Some are smarter or luckier. Others work harder.  Some are more knowledgeable.  The key is that long-term the market is extraordinarily efficient, and at times breathtakingly so. 

The best way –arguably the only way- to take advantage of this efficiency is through relative price strength analysis.  The goal in this approach is to own stocks that go up more than the market and when the market moves down, go down less.  In fact, this is our approach.  The market moving up and Apple moving down through its 200-day moving average, on an absolute and relative basis, had produced our sell signal.  The research client listened.  He sold the stock.  It is now $170 lower.

FRANCIS PATRICK BOLAND