The two exit types, both named at initiation
Two exit types, both pre-named at initiation. (1) THESIS-COMPLETION exits — the price target is reached, the catalyst materializes, the variant perception has been priced in. Scale out, take profits, redeploy. (2) THESIS-BROKEN exits — a pre-named operational signal fails, a falsification trigger fires, a new bear case emerges that the original thesis did not price. Exit decisively at any size you would size a new position with the new evidence; usually that is zero. Both exit conditions are written down at initiation; both are evaluated mechanically when the trigger fires.
Completion and broken exits, trigger by trigger
| Exit type | Trigger | Discipline |
|---|---|---|
| Thesis-completion | Price reaches the base-case target; catalyst plays out; variant perception fully priced | Scale out into strength; never let a winner round-trip to break-even because of attachment |
| Thesis-broken (operational) | A pre-named operational signal moves against you (margin contracts beyond a named threshold, churn accelerates beyond a named rate) | Investigate the explanation; exit if the trigger holds; never re-define the trigger after it fires |
| Thesis-broken (structural) | A new bear case emerges that the original thesis did not contemplate (regulatory shift, technological substitute, balance-sheet deterioration) | Reset to first principles — would you initiate this position today given the new evidence? Size to that answer. |
| Stop-loss (mechanical) | A drawdown percentage hits a pre-named level | Useful for portfolio-level discipline; weaker than thesis-broken exits because it confuses price action with thesis status |
The pre-mortem that names the bear case first
The pre-mortem discipline. Before initiation, write down the answer to: "If this trade loses 30%, what is the most likely reason?" The pre-mortem forces you to name the bear case in concrete operational terms BEFORE you have any attachment to the position. The thesis-broken exit conditions then follow naturally — they are the named bears made into observable signals. Most exits that go wrong fail because the pre-mortem was never written, and so the analyst is improvising the exit decision under pressure with capital at stake.
Writing the exit plan at Brimwood initiation
Worked example — exit plan at Brimwood Lumber initiation. Thesis-completion: scale 30% of position out at $54 (base-case target), 30% more at $58, hold remaining 40% pending fresh thesis if price exceeds $58 with the original catalyst intact. Thesis-broken: exit fully if next-quarter receivables-vs-revenue gap exceeds 4 percentage points without a contracting-mix explanation; exit fully if pass-through speed slows to under 60% of historical (verified by gross-margin walk); exit fully if a regulatory shift on lumber-grading rules surfaces (this is the contemplated structural risk). Stop-loss: portfolio-level rule, exit at 18% drawdown regardless of thesis status — that is a Brimwood-specific risk-budget call, not a thesis-status call.
Honoring the exit plan when conviction strengthens
The exits you survive are written at initiation
Where to deepen the exit discipline
- The memo discipline and the explicit exit section:
memo-3andmemo-4inclient-practice-201— for the memo template that institutionalizes the pre-written exit plan. - Anchoring on cost basis and the disposition effect:
bf-3inbehavioral-finance-201— for the behavioral mechanism that breaks improvised exits. - The investment-thesis structure and the bear case:
ptk-1inpractitioner-toolkit-201— for the anatomy of an investment thesis that includes the falsification trigger. - Thesis-drift checks before triggering an exit:
ptk-12in this path — for the diagnostic that distinguishes a broken thesis from a disagreeing market. - Portfolio-level stop and drawdown discipline:
risk-2andrisk-5inrisk-management-201— for the portfolio-level constraint that overlays the single-name exit plan.
Sit with the ideas.
You wrote at initiation: "Exit if next-quarter receivables-vs-revenue gap exceeds 4 percentage points without a contracting-mix explanation." The quarter prints and the gap is 5.2 percentage points; management's MD&A attributes it to a one-time integration of a recently acquired distributor's billing system, with documented rollback in the following quarter. Which exit discipline applies?