On Selling Out – The Finale

Amar Pandit , CFA , CFP

It’s truly been a joy writing the “On Selling Out” series. I hope you have equally enjoyed reading the content.

I had read Howard Mark’s wonderful book “The Most Important Thing – Uncommon Sense for the Thoughtful Investor” about a decade ago. In his latest Memo, he writes “What’s clear to me is that simply being invested is by far the Most Important Thing.” Someone should write a book with that title, he adds jokingly.

Most actively managed portfolios won’t outperform the market as a result of manipulation of portfolio weightings or buying and selling for purposes of market timing. You can try to add to returns by engaging in such machinations, but these actions are unlikely to work at best and can get in the way at worst.

An aggressive PMS was (sorry still touts) constantly touting its returns for some period of time between 2016 and 2018. They managed to raise loads of money on the promise of superior returns. Guess what? Their performance was one of the worst in the subsequent years. Neither their sectoral calls nor their stock calls were working. Now they are back again bullshitting how good their picks are and so on.

He further adds, “Many economies and corporations’ benefit from positive underlying secular trends, and thus most securities markets rise in most years and certainly over long periods. One of the longest running US Equity indices, the S&P 500, has produced an estimated compounded average return over the last 90 years of 10.5% per year. That’s a startling performance.”

The performance of the Sensex over the last 43 years since 1979 is even more startling. However, that is not really the point. The key points here are the following.

  1. While the investment has delivered returns, has the investor received that return? The investor can only get the investment return if he does nothing but simply stays invested throughout the tenure of the investment (sounds simple but is super difficult for most people in today’s world).
  2. Has the investor allowed compounding to work for him/her or has he/she been interrupting compounding regularly?

Howard Marks then refers to a (October 18,2021) letter by Bill Miller, a legendary investor and writes, “I like the way, Bill Miller, one of the greatest investors of our time, put it in his 3Q 2021 Market Letter:

In the post-war period, the US stock market has gone up in around 70% of the years…Odds much less favourable have made casino owners very rich, yet most investors try to guess the 30% of the time stocks decline, or even worse spend time trying to surf, to no avail, the quarterly ups and down waves of the market.

Most of the returns in stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear, as we saw most recently in the 2020 pandemic decline. We believe time, not timing, is the key to building wealth in the stock market.

I had written a post on July 21,2020 headlined “The 20 best days in the last 20 years.” The point that I was making is exactly what Bill Miller wrote in his letter “Most of the returns in stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear.

This is a concept that every investor must understand. The best days will be during the worst times. The only way to get these returns is by staying invested during the worst times.

Overactive investors or people who believe the believable bullshit that floats around during such times, will simply incur transaction costs and capital gains taxes while missing these sharp bursts.

Mr. Mark adds, “As mentioned earlier, investors often engage in selling because they believe a decline is imminent and they have the ability to avoid it. The truth, however, is that buying or holding – even at elevated prices – and experiencing a decline is in itself far from fatal. Usually, every market high is followed by a higher one and, after all, only the long-term matters.

Reducing market exposure through ill-conceived selling – and thus failing to participate in the market’s positive long-term trend – is a cardinal sin in investing. That’s even more true of selling without reason things that have fallen, turning negative fluctuations into permanent losses and missing out on the miracle of long-term compounding.

When I meet people for the first time and they find out I am in the investment business, they often ask “What do you trade?” That question makes me bristle. To me, trading means jumping in and out of individual assets and whole markets based on guesswork as to what prices will do in the next hour, day, month or quarter. We don’t engage in such activity and few if any have demonstrated the ability to do it well.

Rather than traders, we consider ourselves investors. In my view investing means committing capital to assets based on well-reasoned estimates of their potential and benefiting from the results over the long term.

No one at our firm believes they can make money or advance their career by selling now and buying back after a decline, as opposed to holding for years and letting value lift prices if fundamental expectations prove out.”

I couldn’t agree more.

Do you?


P.S. No one at our firm too believes they can make money or advance their career by selling now and buying back after a decline, as opposed to holding the investments for your goals.