How often have you heard an investment management firm discuss or write about their sell discipline?  Probably never!  Most firms don’t have one.  I was, in fact, in the investment business for 35 years before I fully realized its importance.   Even then, it wasn’t my epiphany.  The realization was forced on me by a client who became a friend.  Roland Grimm was the manager of The Fidelity Trend Fund in the middle 1950s to early 1960s.  He was a pioneer in the then nascent concept of buying growth stocks.  From the 1929 crash until circa 1956 stocks had yielded more than bonds (sound familiar?).  Roland was one of the few people in the 1950s to grasp this paradigm change and invested for growth … not income.  His realization of the changing reality would be a defining moment for Fidelity’s future. 

One morning in the late 1990s, Roland called asking if I could join him for lunch at Locke-Ober’s.  Who could turn down lunch with a Wall Street legend?  Not I.  It was a time when the market was riding the euphoria wave of the internet.  Yet, surprisingly, there were few managers outperforming the market.  I brought a list of possible reasons and asked him to look at it.  He looked at the list and then remarked airily gesturing with a wave of his hand, “You don’t have SELL discipline.  It’s the most important,” he added.  I wrote it down on my list … but with the market going higher virtually every day, it didn’t seem important.  It wasn’t until halfway into 2000 that I realized the significance of Roland’s advice.

It was a summer day in 2000 and I found myself sitting across the desk from a research client.  (We had entered the money management business ourselves just a few months earlier).  I was telling the client that we had a sell on what had been one of the hottest stocks of the dot.com era, Cisco Systems.  At the time it was $50 down from $70.  His response was, “You didn’t tell me to sell when it was it $70 so why sell it when it’s at $50?” The client didn’t want to sell, he wanted to buy more!  He probably did.

That meeting came back to me recently when I read an article describing how difficult it was already in 2016 (as of February 10^th) for three famous mutual fund managers.   Ron Baron of Baron Partners was off 23.47%.  Ken Heebner of CGM was down 25.10% and Bill Miller of Legg Mason was down 27.90%.  This was in a time frame of January 1 to February 10! The S&P 500 in the same period was off 9.19%.  My immediate thought was while these men have always been great stock “pickers,” apparently they lacked a clearly defined SELL discipline!  And that is a major key to portfolio management.  The math is unique to portfolio management.   If a stock declines 50% one must find another that has the capability of going up 100% to just break even.  It’s very difficult to do … especially if it is a bear market.

At the time Roland Grimm and I had lunch, I asked if there was a reason he was in Boston (He had multiple residences).  “Well, he said slowly.  After we have lunch, I’m going over to Fidelity.  They are inducting me into the Fidelity Hall of Fame.”  As for the portfolio manager in 2000, I don’t know.  I do know Cisco hasn’t seen $50 for the past SIXTEEN years.  It’s currently $26 and it hasn’t split!

Francis Patrick Boland