NEW DELHI: Reducing market exposure through ill-conceived selling, and thus failing to participate fully in the positive long-term trend of markets is a cardinal sin of investing, distressed debt specialist and Oaktree Capital co-founder Howard Marks has written in a memo titled “Selling Out” to his clients.
As per Marks, when investors find an investment with the potential to compound over a long period, one of the hardest things is to be patient and maintain position as long as doing so is warranted based on the prospective return and risk.
Further, investors can easily be moved to sell by news, emotion, the fact that they’ve made a lot of money to date, or the excitement of a new, seemingly more promising idea.
As per Marks, “buy low, sell high” is a hackneyed caricature of the way most people view investing.
To make his point, he quoted investment advice by Will Rogers, an American film star and humorist of the 1920s and ’30s: “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”
“The illogicality of his advice makes clear how simplistic this adage – like many others – really is. However, regardless of the details, people may unquestioningly accept that they should sell appreciated investments. But how helpful is that basic concept?” Marks questioned.
Marks gave an example of Amazon, saying that everyone wished they’d bought Amazon at $5 on the first day of 1998. Since then, the stock is up 660 times at $3,304.
According to Marks, many wouldn’t have continued to hold Amazon when the stock hit $85 in 1999 – up 17 times in less than two years. “Or who wouldn’t have sold by late 2015 when it hit $600 – up 100x from the 2001 low? Yet anyone who sold at $600 captured only the first 18% of the overall rise from that low,” he said.
Giving another example, Marks said studies have shown that the average mutual fund investor performs worse than the average mutual fund. As per the expert, on average, mutual fund investors tend to sell the funds with the worst recent performance (missing out on their potential recoveries) in order to chase the funds that have done the best (and thus likely participate in their return to earth).
Marks opined that a good deal of selling takes place because people like the fact that their assets show gains, and they’re afraid the profits will go away. “I’m not saying investors shouldn’t sell appreciated assets and realize profits. But it certainly doesn’t make sense to sell things just because they’re up,” he wrote in the memo.
According to Marks, as wrong as it is to sell appreciated assets solely to crystalize gains, it’s even worse to sell them just because they’re down. “While the rule is “buy low, sell high,” clearly many people become more motivated to sell assets the more they decline.”
As per Marks, superior investing consists largely of taking advantage of mistakes made by others. “Clearly, selling things because they’re down is a mistake that can give the buyers great opportunities,” he wrote.
Making a case for when to sell, the expert said that there are good reasons for selling, but they have nothing to do with the fear of making mistakes, experiencing regret and looking bad. “Rather, these reasons should be based on the outlook for the investment – not the psyche of the investor – and they have to be identified through hardheaded financial analysis, rigor and discipline,” he opined.
On how much is too much to hold, Marks said that we should base our investment decisions on our estimates of each asset’s potential, and shouldn’t sell just because the price has risen and the position has swelled. “There can be legitimate reasons to limit the size of the positions we hold. But there’s no way to scientifically calculate what those limits should be,” he said.