The Rational Investor #031: Howard Marks on Why You Shouldn’t Sell in Anticipation of a Decline
Happy Saturday to you,
Welcome to the 31st edition of The Rational Investor Newsletter.
Today’s quote comes from Howard Marks’s memo titled Selling Out from January 2022. If you’ve not read Howard Marks’ memos, I highly recommend doing so. While I don’t necessarily agree with 100% of Marks’s investing approach, I believe the cumulative wisdom in his collection of memos makes for the best investment thinking anywhere, and it’s all freely available via the Oaktree website.
As this bull market run continues and the market sits at all-time highs, there is no shortage of pundits predicting a punishing bear market that lies just around the corner. One perpetually-wrong soothsayer went so far as to predict an 86% decline coming this year. He looks a lot like the guy below…
The question is, should you sell if you think a decline is coming? That’s the subject of this week’s quote from Howard Marks.
Onto the main event…
Here’s Howard Marks on Why You Shouldn’t Sell in Anticipation of a Decline [Emphasis is that of the author]:
“…what about the idea of selling because you think a temporary dip lies ahead that will affect one of your holdings or the whole market? There are real problems with this approach:
+ Why sell something you think has a positive long-term future to prepare for a dip you expect to be temporary?
+ Doing so introduces one more way to be wrong (of which there are so many), since the decline might not occur.
+ Charlie Munger, vice chairman of Berkshire Hathaway, points out that selling for market-timing purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and if it does, you’ll have to figure out when the time is right to go back in.
+ Or maybe it’s three ways, because once you sell, you also have to decide what to do with the proceeds while you wait until the dip occurs and the time comes to get back in.
+ People who avoid declines by selling too often may revel in their brilliance and fail to reinstate their positions at the resulting lows. Thus, even sellers who were right can fail to accomplish anything of lasting value.
+ Lastly, what if you’re wrong and there is no dip? In that case, you’ll miss out on the ensuing gains and either never get back in or do so at higher prices.
So it’s generally not a good idea to sell for purposes of market timing. There are very few occasions to do so profitably and very few people who possess the skill needed to take advantage of these opportunities.
There’s an awful lot I could say about the quote above, but I want to focus on his first point.
That is, if all declines are likely to be temporary—which, of course, 100% of declines to this point have been exactly that—then making the decision to sell in preparation for a decline introduces the possibility (probability!) of underperforming the market over the long-term, which is a risk that most investors can’t afford.
Thus, one of my favorite principles I’ve created over the years is, “If you never sell, you never have to regret having sold.” That’s about as simple of a path to earning market returns as I can think of.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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