Should you sell shares at highs? Not always, says Howard Marks

Marks says investors often engage in selling at highs because they believe a decline is imminent and they have the ability to avoid it. The truth, he said, 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 return matters,” he told Oaktree clients in a memo titled ‘selling out’.

Marks said reducing market exposure through ill-conceived selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal sin in investing.

That’s even more true for selling without reason things that have fallen, turning negative fluctuations into permanent losses and missing out on the miracle of long-term compounding.

Investing, Marks said, means committing capital to assets based on well-reasoned estimates of their potential and benefitting from the results over the long term.

Marks said “profit-taking” is the intelligent-sounding term for selling things that have been appreciated. To understand why people engage in it, one needs insight into human behavior, because a lot of investors’ selling is motivated by psychology.

Aphorisms like “no one ever went broke taking a profit” may be relevant to people who invest part-time for themselves, but they should have no place in professional investing, Marks said.

“There certainly are good reasons for selling, but they have nothing to do with the fear of making mistakes, experiencing regret and looking bad. Rather, these reasons should be based on the outlook for the investment – not the psyche of the investor – and they have to be identified through hardheaded financial analysis, rigour and discipline,” he said.

Marks added that superior investing consists largely of taking advantage of mistakes made by others. Clearly, selling things because they’re down is a mistake that can give the buyers great opportunities, he said.

The market guru said one should base investment decisions on estimates of each asset’s potential and should not sell just because the price has risen and the position has swelled.

There can be legitimate reasons to limit the size of the positions one hold’s but there’s no way to scientifically calculate what those limits should be.

“Most investors try to add value by over- and underweighting specific assets and/or through well-timed buying and selling. While few have demonstrated the ability to consistently do these things correctly, everyone’s free to have a go at it. There is, however, a big “but.”

In other words, the decision to trim positions or to sell out entirely comes down to judgement, like everything else that matters in investing.

“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!) 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,” he said.