Mebisode: When to Sell

Episode Summary

Executive Summary: Meb Faber argues investors spend too much time deciding what to buy and too little on when and why to sell. He urges longer evaluation windows, warns against judging by recent returns alone, and outlines legitimate sell reasons such as strategy failure, changing goals, rising costs, size constraints, or manager changes. The episode closes by recommending written plans and partial-position moves to reduce regret and emotional decision-making.

Main Topics: How long to judge an investment (Priority: 5/5): The episode argues that investors need much longer time horizons to evaluate a strategy fairly because short windows are dominated by randomness and luck. Dumb reasons to sell: recent performance (Priority: 5/5): Selling solely because an investment has recently underperformed or because a benchmark has outperformed is criticized as a common and flawed habit. Even winners can look like losers (Priority: 4/5): Winning funds and stocks often suffer long drawdowns and multi-year underperformance, so strong long-term ideas can be abandoned too early. Good reasons to sell (Priority: 5/5): Valid sale triggers include strategy size becoming unwieldy, thesis failure, changing personal goals, manager turnover, style drift, fee increases, and better alternatives. Written rules and humility (Priority: 4/5): The speaker recommends writing a sell framework in advance and being honest about motivations to avoid fooling oneself. Use partial moves to reduce regret (Priority: 3/5): If uncertain, investors should consider selling or buying in halves or increments rather than making all-or-nothing decisions.

Key Arguments: Investors often evaluate funds too quickly; the speaker suggests a minimum multi-year horizon, with 10 years presented as a more rational benchmark than 1-3 years. Performance-based selling is unreliable because even high-quality strategies and managers can underperform for years due to randomness. Winning investments can be extremely volatile; Amazon is used as an example of a great long-term winner that endured severe drawdowns. Professional investors are also prone to performance chasing and may fire good managers too early, not just retail investors. Selling should be based on pre-committed criteria such as goal changes, thesis breakdown, excessive fund size, or fee/tax inefficiency. A written investment plan should define acceptable reasons to sell in advance and exclude impulse reactions to short-term returns. When indecision is high, partial transactions can lower regret and make process-driven investing easier to maintain.

Data Points: Suggested minimum holding/evaluation period: 10 years - Presented as a more reasonable horizon than a few years for judging an investment's merit. Time horizon some investors use to judge underperformance: a few years at best - Result from the speaker's Twitter poll on how long investors would give an underperforming investment. Time horizon Ken French said was needed to confidently know active alpha: 64 years - Used to illustrate how hard it is to infer skill from short-term results. Vanguard active funds sample size: 552 funds - Paper cited to show that even winning active funds often underperform for long stretches. Winning funds that underperformed in at least five years: 94% - From the Vanguard study on funds that beat the market from 2000 to 2014. Winning funds that underperformed in at least seven years: about half - From the same Vanguard study, showing extended underperformance is common. Buffett annual underperformance frequency vs. S&P: about a third of all years - Example showing even the most successful investor experiences many losing years. Academic hiring/firing study: 8,775 hiring and firing decisions - Cited evidence that professional allocators chase performance. Plan sponsor sample: 3,417 plan sponsors - Used in the study on manager hiring/firing behavior. Assets under review in hiring/firing study: $627 billion - Shows the scale of institutional performance-chasing behavior.

Pivotal Quotes: "It's better to be Rip Van Winkle than nostradamus." — Meb Faber: Used to emphasize that investors should favor patience over predicting near-term outcomes. "The first principle is you must not fool yourself, and you're the easiest person to fool." — Richard Feynman: Referenced as a reminder to be honest about whether a sale is truly justified. "Every trade makes you richer or wiser, never both." — Bill Duomel: Used to frame investing mistakes as learning opportunities and encourage self-compassion.

Implications: Listeners should adopt written, long-horizon sell rules, avoid reacting to recent returns, and use partial trades when unsure. This can reduce performance chasing, improve portfolio discipline, and lower regret in volatile markets.