Calibrate Selling

Systematic errors in selling come in two forms: selling too quickly or too slowly. Behavioral influences, such as unrealized gain (Winner) and unrealized losses (Loser), have been shown to compound these types of persistent errors.

The figure to the right offers a basic look at sell effectiveness. The values located in each quadrant of the 2x2 matrix indicate the alpha generated from selling the corresponding positions. For example, in this illustration when management sells Winners Quickly (meaning faster than the fund's average holding period) the result generally is ineffective – indicated by a sell alpha of -135 bps for these positions. Ineffective selling can be and is found in every quadrant and combination. Actual results determined for more than $150 billion of equities are impressive and vary from fund to fund.

Although this level of analysis provides insight it does not deliver actionable results. Successful changes to selling (i.e. "behavioral shifts") reflect more pinpointed findings. Pinpointing identifies shifts which deliver the greatest predictive benefit. Pinpointed findings may be constructed using a wide range of attributes including: Winner/Loser, Earnings Quality, Consensus Earnings Forecast, Price Volatility, Price Momentum or any client defined stock performance indicators or factors. These attributes are used to identify information coincident with a sell behavior. Often 2 or more attributes are used to accurately pinpoint and shape a behavioral shift (e.g., Encourage selling of winners, held more than 15 months, when their Earnings Quality factor begins to decline). Daily implementation support recommending positions whose sell is favored or discouraged enables managers to capture the benefits from their pinpointed findings.

Cabot Behavioral Analysis is helping managers to hone their selling right now. Applied to more than $150 billion of professionally managed equities, CBA is supporting many managers in capturing 100+ of incremental performance annually.