On Selling Out – Part 1

Amar Pandit , CFA , CFP

I had written a Nano headlined “When to Invest and Sell” on January 7th,2022. Many of you loved it. Though that Nano sums up pretty well all that you need to know about when to sell (and invest), I decided to dedicate a series of posts and/or nanos to one of the most important topics in investing – “Selling appreciated assets.” This series is based on Oaktree Capital’s Howard Marks Memo “Selling Out.

The basic idea according to Mr. Marks is this – “Everyone is familiar with the old saw that’s supposed to capture investing’s basic proposition: “buy low, sell high.” It’s a hackneyed caricature of the way most people view investing. But few things that are important can be distilled into just four words; thus, “buy low, sell high” is nothing but a starting point for discussion of a very complex process. People may unquestionably accept that they should sell appreciated investments. But how helpful is this basic concept?

  1. Most investors trade too much for their own detriment.
  2. The best solution for illiquidity is to build portfolios for the long term that don’t rely on liquidity for success.

Long-term investors have an advantage over those with short time frames (and I think the latter describes the majority of the participants these days). Patient investors are able to ignore short-term performance, hold for the long run, and avoid excessive trading costs, while everyone else worries about what’s going to happen in the next month or quarter and therefore trades excessively.

Like so many things in investing, however, just holding is easier said than done. Too many people equate activity with adding value.

When you find an investment with the potential to compound over a long period of time, one of the hardest things is to be patient and maintain your position. Investors can easily be moved to sell by news, emotion, the fact that they have made a lot of money to date, or the excitement of a new, seemingly more promising idea.”

Scary Headlines are the easiest way to get people to give up (aka sell) their investments. Think about it.

He writes further “Everyone wishes they had bought Amazon at $5 on the first day of 1998, since it is now up 660X at $3304.

  • But who would have continued to hold when the stock hit $85 in 1999 – up 17x in less than 2 years?
  • Who amongst those would have held on would have been able to avoid panicking in 2001, as the stock price fell 93%, to $6?
  • And 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.”

Closer to home, there was a 200x Fund that I had written a post about recently. How many people do you think stayed invested in that fund that gave a stellar 200x returns in 26 years or so?

Not even 1% of the original investors.

Another interesting story that comes to my mind is that of Dogecoin Founder, Billy Markus. Trust me, I am not digressing into the world of Crypto. Just wanted to highlight how predictive human behaviour is when it comes to selling (and of course buying). While the market capitalization of Dogecoin today is around $18+ billion dollars, Billy Markus had sold his entire stake for around $10000. Can you believe this? The Founder himself sold his entire stake because he never thought Dogecoin would be worth that much. He had thought of it as a joke, something he had started for fun. The point I am making is – it’s simply difficult to stay invested.

He further writes “This reminds me of the time I once visited Malibu (an extremely wealthy residential area in Los Angeles) with a friend and mentioned that the Rindge family is said to have bought the entire area – all of 13,300 acres – in 1892 for $300,000, or $22.50 per acre. (It’s clearly worth billions today.) My friend said, “I’d like to have bought all of Malibu for $300,000.” My response was simple: “you would have sold it for $600,000.

The more I thought about selling, the more convinced I have become that there are 2 main reasons why people sell investments: because they are up and because they are down. You may say that sounds nutty, what’s really nutty is many investors’ behaviour.”

You need a superpower or the care of a real financial professional to help you to stay invested – to help you see things that you can’t on your own. We all have blind spots. We need professionals not because we are stupid, but because they are not us. They will see things about us that we cannot see ourselves.

To Be Continued.