Investment Wisdom from Howard Marks and Andrew Marks
Summary:
Time and not timing - staying invested is the most important thing in building wealth,
It is easy in hindsight when you are looking at a chart that has gone up for 20 years to not sell but think about the times the holder would have to convince himself not to sell ( the Malibu story).
Why people sell? To take profit and realize gains or to avoid future losses (psychological reasons). It is wrong to sell for price reasons (whether up or down)
Realized gain is a misnomer. You have the question, what will you do with the sales proceeds.
Investing is a game of relative selection. Selling cannot be viewed in isolation. One should ask and then what questions.
The only right time to sell is when you are wrong or when you have higher conviction and better opportunities.
Selling opens you up to three potential mistakes:
The decline may or may not occur
If it does, you have to figure out when the time is right to go back in
What to do with proceeds while you wait
Mohnish Pabrai recommends that one should not sell within 2-3 years of buying unless there is a high degree of certainty that the intrinsic value is less than the market value.
Fortunes are made when you have the vision to see them, the courage to buy them and the patience to hold them (quote from Thomas Phelps' 100 to 1 in the Stock Market)
Introduction
One of the hardest questions to answer among value investors is when to sell. There is no shortage of anecdotes about the heroic prowess in buying and holding investments courageously. The art of holding on is deeply ingrained in the value investing psyche.
Philip Fisher, influential to both Warren Buffett and Charlie Munger, said: "if the job has been correctly done when a common stock is purchased, the time to sell is- almost never". Warren Buffett: "our favorite holding period is forever".
Mohnish Pabrai, did attempt to answer this question in Chapter 15 (Abhimanyu's Dilemma- The Art of Selling) of his book The Dhandho Investor. Pabrai's response to the question of when to sell is closely linked to the question of why you bought the investment in the first place. To be more concrete, Pabrai recommends that one should not sell within 2-3 years of buying unless you can say with high degree of certainty that the intrinsic value is less than the current market price of the shares. Why 2-3 years? this is because market is efficient in the long run. This means that it is highly likely that the gap between the intrinsic value and market price will close over a longer period of time.
Investment Wisdom from Howard Marks - When to Sell
Below is some of the most powerful gems I learned from Howard Marks on the question of selling. His most recent memo - Selling Out is one of my most favourite memos (he has written many) next to his well received memo Something of Value.
1. Time and not timing - staying invested is the most important thing in building wealth
Before we ask the question of when to sell, it is important to remember that simply being invested is the most important thing. Marks quoted the legendary investor Bill Miller who, after reminding everyone that the greatest returns in the stock market were generated from periods of maximum pessimism, said:
"We believe time, not timing, is the key to building wealth in the stock market.
Staying invested and fully participating in the long term power of compounding.
2. It's easy in hindsight but think of the times you would have had to convince yourself not to sell
The Rindge family bought Malibu bought the entire Malibu - 13,330 acres in 1892 for USD 300,000. The entire Malibu, California for USD 300,000! While Marks was touring the place, his friend commented that he would like to buy the entire Malibu at USD 300,000. To which, Marks replied - "You would have sold it when it got to USD 600,000". How true!
An interesting thought experiment - imagine in 1998, you had the foresight and conviction to buy Amazon at $ 5 on its first day:
In 1999: it rose to USD 85- 17x in less than 2 years - would you not sell?
In 2001: with the dotcom bubble questioning the new new thing then - shares fell to $6 (93% lower) - would you still have the courage to hold?
In 2015: after years of stagnation, assuming you still held on to that Amazon shares - would you not sell at $600 - 100x from the 2001 low.
Amazon is now at USD 3,300 + : would anyone have the foresight, courage and conviction not to sell.
Andrew Marks, son of Howard Marks, said it elegantly:
"When you look at the chart for something that's gone up and to the right for 20 years, think about all the times a holder would have had to convince himself not to sell.
3. Why sell? If it goes up (avoid regret) and if it goes down (fear)
There are only two reasons why investors sell - if price goes up and if it goes down and these are generally psychological in reasons.
If it goes up: I had a recent conversation with my wife who urged me to sell one of the big winners in our portfolio that I have held for more than 5 years now. Why I asked? She replied: "So we can crystalize and realize the gains and re-invest again in the same share" . When we talk about taking profit and realizing gains, there seems to be a finality in this act. But in reality, this doesn't stop here. Once we realize gains, we have to reinvest again. Unless there is a better alternative, it doesn't make sense to sell an investment and re-invest it at the same (because of leakage from tax) or worse, inferior investments.
If it goes down: just as it is wrong to sell investments just because it has gone up, it is equally wrong to sell assets just because it has gone down. It is well documented empirically how investors make substantial systematic error especially in times of panic. It is in periods of maximum pessimism that superior investors are able to take advantage of investors' collective fear and build a foundation for long term positive compounding.
Conclusion: it is wrong to sell for price reasons alone (whether up or down).
4. Investing is the discipline of relative selection
One of my favorite parts of the letter is when Marks cited how Sidney Cottle defined investing. Sidney Cottle is one of the co-authors - along with Columbia's Roger Murray- in the 5th Edition of Graham and Dodd's Security Analysis- the only edition of Security Analysis that I did not read but maybe I should given that both Howard Marks and Mario Gabelli learned from this edition).
According to Sidney Cottle:
"Investing is the discipline of relative selection".
What does this mean practically? This means that selling is not a decision that can be considered in isolation. Instead, and then what questions must be asked.
When you sell:
What do you plan to do with the sales proceeds?
Is there a better alternative?
If you do not sell, what are you giving up? If you sell what are you giving up?
5. When to sell? Sell only when there is a better investment opportunity
I do not want to spoil this wonderful father and son (Howard and Andrew Marks) conversation on this topic. So I am excerpting the conversation between Howard and Andrew Marks on this topic:
So when is it the right time to sell? Only in two situations:
If the fundamentals are not playing out as hoped or expected
If there are better high conviction opportunities that are available
Charlie Munger and Howard Marks points out the danger of selling for market timing reasons:
The decline may or may not occur
If it does, you have to figure out when the time is right to go back in.
Once you sell, you have to decide what to do with the proceeds while you wait until the dip occurs and the time comes back to get back in.
To end, I would like to quote from one of my favorite books in investing (an out of print book for a very long time):
Fortunes are made when you have: "the vision to see them, the courage to buy them and the patience to hold them".