The Art of Selling(A)

Prudent investors are typically eager to know what securities they own, when they were bought and why. As investment managers, we are focused on making smart buy decisions and communicating with clients about the holdings we’ve purchased – but our job also includes making sound decisions about when to sell. Arguably, the decision to sell a stock is as important as the decision to buy.
Overall, our strategy is the proverbial “buy low, sell high.” Ideally, we aim to buy a stock when it appears undervalued, benefit from the stock’s appreciation to full market value, and then sell to capture gains when the stock has peaked. Of course, we not only want to buy winners, we also want to avoid losers. At Trillium, our sell discipline is designed to both lock in gains and minimize losses.
In the optimal case, we sell a stock after it has increased in price. When our analysis indicates a stock has reached an excessive valuation, we will sell the position in its entirety. As long-term investors, however, if a stock has reached its price target but we still see potential for further appreciation, we may trim and realize partial profits rather than sell the stock outright. We might also sell a portion if the holding or its industry has become too large relative to the overall portfolio. What this means for your portfolio is that you may see small holdings of stocks selling at relatively high valuations, but where we still see potential for growth.
But, of course, stocks don’t always go up. And here, when a stock declines in price, having a strong sell discipline is both humbling and important. At Trillium, our investment committee reviews all holdings weekly, and any stock that has declined 20% in price from its 52-week high warrants special attention. As we review stocks that have declined, the key question is: what is the best place to invest our clients’ assets now given the drop in price? There are three possible actions:
1. Sell: Our analysis indicates deterioration in company or industry fundamentals and we believe there are better investments going forward. (There is, of course, also the special case of a change in a company’s social responsibility status leading us to sell a stock.) What this means for your portfolio: you may see stocks sold at a significant loss and the proceeds invested elsewhere. For taxable accounts, this creates a realized capital loss.
2. Hold: Our analysis indicates uncertainty about a stock’s outlook, but we believe there is greater potential for upside than downside. What you may see on your portfolio appraisal in this case: stocks held in your portfolio at a significant unrealized loss – a loss we believe will be temporary.
3. Buy more: Our analysis indicates the stock is “on sale.” We liked owning the stock at a higher price and see no significant negative change in company fundamentals; we like the stock even better at its new cheaper price and decide to add to positions. What this means for your portfolio: you may see additional lots of a stock purchased at a price lower than the initial purchase price.
Our Investment Management Committee is the team charged with making both buy and sell decisions at Trillium. Decisions to add, delete or trim stocks are made by the entire committee, which meets on a weekly basis, and then implemented in client accounts by individual portfolio managers. We are confident that our team, which includes 12 portfolio managers and analysts with an average 17 years of investment experience, is among the best in the business. Of course, the markets sometimes outsmart us and we may sell a stock before a rise, or hold a stock that then declines. Our success, and your portfolio performance, is based on our team making the right decisions the majority of the time – both when buying and selling stocks.