Portfolio management
Cutting the flowers
I return to the subject of selling stocks. As I noted in my post of February 1, 2026 the evidence seems clear that money managers’ weakest point is in selling. The task that leads to the worst performance is the decision to sell. I would guess the same is true of individual investors. In a nutshell, it comes from the impulse to ‘cut the flowers and water the weeds’.
In a note dated March 04, 2026 Pzena Investment Management wrote: “Over the past few years, U.S. large-cap indices have been dominated by extreme momentum stocks mostly levered to the AI theme. These types of one-way markets are particularly challenging for active managers, who are conditioned to sell outperformers and recycle capital into undervalued stocks.” (Emphasis Added)
Why ‘conditioned to sell outperformers’ did badly
The Pzena report goes on: “Given our disciplined approach to value investing, this two-year momentum-driven period has presented challenges in terms of relative returns…”
They add: “We maintain that a targeted, research-driven, active strategy is crucial to generating alpha, and we believe that our U.S. large-cap portfolios are especially well positioned to achieve long-term returns in excess of the overvalued R1000V [Russell 1000 Value Index] benchmark.”
The note is aimed at their clients by way of explaining their recent underperformance against their benchmark. What caught my eyes was the investment process/investment philosophy notion that active managers are “conditioned to sell outperformers and recycle capital into undervalued stocks”.
Pzena Investment Management is an American investment management firm. Its expertise is in deep value investing. It oversees assets under management for institutions, high-net-worth individuals and mutual funds. The company is headquartered in New York City and has offices in London, Melbourne and Dublin. It has assets under management of approximately US$72 billion.
Thanks to The Acquirer’s Multiple for this link.
Deep value investing
Pzena describe themselves as deep value investors. I’m not sure what to make of their comment that active managers are ‘conditioned to sell outperformers’. Are they saying it’s the right thing to do or are they sayings it’s something bad to watch out for. I suspect they are saying that deep value investors like them are inclined by their investment philosophy to sell outperformers. If that’s what they are saying, I think their approach is dead wrong.
Warren Buffett
Warren Buffett put it this way in the Berkshire Hathaway Chairman’s letter for 1988: “… when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.” (Emphasis Added)
There is not much more to say.
Conclusion
The decision to sell a stock is, in many ways, trickier than the decision to buy. My own observation is that investors in common stocks should never be conditioned to sell outperformers. There is a time to fold ‘em. But its not simply because their price has outperformed the market or some benchmark.
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I have written a lot about selling. Readers might want to check out these posts:
19 Cardinal rules on selling stocks
There’s a time to hold ‘em and a time to fold ‘em.
Minimizing regret is a loser’s strategy
Selling a big winner is a tricky decision (example of selling a stock that has reached a a grossly inflated price)
How I invest my money (a case in point in selling a stock that became wildly overpriced relative to fair value)
Selling a stock – goodbye old friend (another sale of a seriously overpriced stock)
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