Introducing "Behind The Memo": Selling Out

Episode Summary

Executive Summary: Howard Marks argues that investors overvalue liquidity and trade too much, often selling winners out of fear of giving back gains and selling losers out of fear of further declines. He says market timing is usually a mistake, that selling should be driven by intrinsic value and relative opportunity, and that the most important investing principle is staying invested to benefit from long-term compounding.

Main Topics: Liquidity and the value of holding illiquid assets (Priority: 5/5): Marks revisits his 2015 memo on liquidity and questions whether investors are truly helped by liquidity they rarely use. He notes that many private investments are never sold anyway and that portfolios can accommodate some illiquid holdings. Why investors sell winners (Priority: 5/5): He argues that people often take profits because gains create psychological discomfort and fear of regret, even though selling appreciated assets can prevent investors from holding long-term compounders like Amazon. Why investors sell losers (Priority: 5/5): Marks explains that falling prices often trigger doubt, fear, and a desire to avoid further losses, leading investors to reduce positions at exactly the wrong time and chase winners instead. The flaws of market timing (Priority: 5/5): He criticizes selling in anticipation of a dip, saying it creates multiple chances to be wrong: the dip may not happen, the re-entry point may be unclear, and cash may underperform while waiting. Legitimate reasons to sell (Priority: 4/5): Marks says selling can be justified when intrinsic value or thesis quality deteriorates, or when a better investment opportunity appears and portfolio reallocation is needed. Relative selection, opportunity cost, and judgment (Priority: 4/5): He emphasizes comparing investments against each other, considering opportunity cost, and relying on judgment rather than formulaic rules to decide when to sell or buy. The primacy of staying invested (Priority: 5/5): Marks concludes that for most investors, the key to success is remaining invested in assets benefiting from long-term economic and corporate growth rather than trying to time highs and lows.

Key Arguments: Most investors trade too much, and trading often adds costs, market impact, and error rather than value. Liquidity is desirable in theory, but investors often do not use it; illiquid assets can still be appropriate in a diversified portfolio. Selling because an asset has risen is usually driven by regret avoidance and the desire to lock in gains, not by rational analysis. Selling because an asset has fallen is often driven by fear and loss aversion, which can lead investors to dump undervalued assets before a rebound. Retail mutual fund investors tend to underperform mutual funds because they chase winners and abandon losers. Passive investing grew because active managers and market timers, on average, fail after fees and trading costs. Market timing is especially hazardous because investors must be right about both exiting and re-entering, and they may never re-enter. Proper selling should be based on changes in intrinsic value, reduced thesis conviction, or the existence of a clearly better alternative. Investment decisions should be made comparatively, weighing relative selection and opportunity cost rather than isolating one asset in a vacuum. Long-term wealth creation comes primarily from staying invested and allowing compounding to work over time.

Data Points: Amazon price increase: from $6 to roughly $3,300 - Example used to show how difficult it is to hold a huge winner without selling along the way Amazon multiple: about 650x - Illustrates the scale of a long-term stock winner Amazon intermediate milestone: $600 after 10 years - Marks the point at which many investors might have sold after a 100x gain Average mutual fund investor vs mutual fund: Investors do worse than the average mutual fund - Used as evidence that investors chase and sell at the wrong times Equity mutual fund capital: Majority now invested passively - Attributed to the poor record of active management and stock picking Cash yield: Approximately zero - Explains why selling into cash can impose a high opportunity cost S&P 500 average return: 10.5% per year over 90 years - Used to demonstrate the power of long-term compounding $1 invested 90 years ago: About $8,000 today - Shows the historical effect of compounding without trading $1 invested today at 10.5%: $147 in 50 years - Projected future compounding example Reduced return scenario: 7% per year - Marks offers a conservative alternative assumption for future market returns $1 at 7% for 50 years: $29 - Illustrates that even lower future returns still compound meaningfully Market direction history: Stock market goes up historically 7 or 8 years out of 10 - Used to support the argument that staying invested is usually beneficial

Pivotal Quotes: "If you think about it, it's not a matter of what you buy and what you sell. It's a matter of what you hold." — Howard Marks: Explaining that long-term investment success comes from owning the right assets over time, not constant trading "Don't just do something, stand there and let your holdings compound." — Howard Marks: His reinterpretation of the old adage to emphasize patience over excessive trading "We believe that time, not timing, is the key to building wealth in the stock market." — Bill Miller: Quoted by Marks to reinforce the case for long-term investing

Implications: Investors should focus less on trading and market calls, and more on intrinsic value, relative opportunity, and patience. For most, staying invested and compounding over time will outperform attempts to time exits and re-entries.