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Clear Thoughts
Selling on Discipline
| Clear maintains its disciplined methods by selling a stock favorite, HANS. |
Discipline, it is one of the hardest things to maintain in life. The word conjures images ranging from martial artists and professional athletes to musicians, and for us, yes, even asset managers.
Dictionary.com defines discipline as:
- Training expected to produce a specific character or pattern of behavior, especially training that produces moral or mental improvement.
- Controlled behavior resulting from disciplinary training; self-control.
For an asset manager discipline is one of the most challenging things to achieve. The temptation to follow a pack and the allure of enhanced performance are a siren song few can resist. They can cause style drifting, unnecessary risk taking and in the end, herd performance.
Clear Asset Management is founded on the principal that emotion and following anything except our computer algorithms and trading rules has no place in the investment process. Investment decisions include both buying and perhaps more importantly, selling securities.
Our computers direct our purchases and sales. Many of our transactions are adding and trimming shares as valuation and rankings fluctuate. We also have very strict trading rules such as loss limits on individual stocks and trades to prevent style drift.
Yesterday we sold our highest performing investment to date, Hansen Natural Corp (HANS) from our Small Cap Growth portfolio on discipline. When the market closed Tuesday we were up 193.28%, the stock was still rated number 2 and our computers continued to recommend the stock based upon its fundamentals as compared to other small cap growth stocks. So what is the discipline that compelled us to sell HANS?
This week the stock rose beyond our small cap portfolio limit of $1 billion in market capitalization. We complained to each other and hoped the stock would also meet the rigorous criteria to instantly move to our Clear Mid Cap Growth portfolio, as this is a stock we love. However, looking at the hard facts, as our computers and ultimately we as asset managers do, we see that the rise in stock price was accompanied by a price to earnings ratio increase too, making the stock less attractive in the universe of mid cap growth stocks. Upon further scrutiny, we view HANS as no longer the growing at a reasonable price darling we originally invested in, since it has reached its upper limits in several key fundamental categories and is no longer as attractive an investment opportunity as before.
Maintaining discipline as HANS moved up within our rankings and continued to increase in price would not have been easy for most asset managers. They would have been tempted to sell the stock and lock in profits all along the way, or to hold on to it even after. For us at Clear Asset Management, this was not difficult because of our objective and unemotional investment approach. Not every stock is a winner, as we all well know, so having a big winner is part of how we achieve our overall performance, and potentially, beat the benchmarks.
The simple fact is that our system works, discipline is always good and we have been fortunate that HANS has provided us with such an amazing return.
So we bid a fond farewell for now to HANS, intellectually and numerically we know we are right, and discipline once again triumphs over emotion for the benefit of our investors. |
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