When should investors sell a stock? Insights from Howard Marks on market timing

Whenever a stock price reaches a new high, many investors regret not buying it when it was available at a dirt-cheap price. But even if they had purchased the stock at a very affordable price, how long would they have held on to it?

It's difficult for an investor to resist the temptation of selling a stock when it has considerably appreciated, say 2x or 3x from the initial price.

Generally, people sell a stock at its high, thinking it may fall going forward. This way, they try to minimise the future downward risks. People also sell when a stock starts falling. But, in the process of selling based on whether a stock is up or falling, they lose the chance to create lasting wealth.

As investing guru and co-founder of Oaktree Capital, Howard Marks puts it, "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."

In this article, we have summarised some of the most relevant arguments made by Marks about selling a stock and market timing.

What is the most important thing to do in the market?

Marks writes, "it’s generally not a good idea to sell for purposes of market timing."

An investor can get very few opportunities to time the market for profit. And there are very few investors who can identify and make a profit from such opportunities.

Therefore, Marks says that simply being invested is by far “the most important thing.”

Why do people sell?

According to Marks, most selling in the stock market happens "because people like the fact that their assets show gains, and they’re afraid the profits will go away."

People often sell old assets at a profit to invest in new opportunities. There is also the argument that appreciated stocks are more vulnerable to declines than new investments in assets currently deemed to be attractively priced. However, Marks says this is "far from a certainty."

In other words, the chances of a new investment appreciating in the future are not always certain. Therefore, it is not always right to sell a stock just because its price is up.

"I’m not saying investors shouldn’t sell appreciated assets and realize profits. But it certainly doesn’t make sense to sell things just because they’re up," he writes.

He further says it is also not good to sell a stock because it is down. "As wrong as it is to sell appreciated assets solely to crystalize gains, it’s even worse to sell them just because they’re down. Nevertheless, I’m sure many people do it."

When to sell?

"When to sell" is probably the toughest question many investors fail to crack. Those who do end up as super-rich.

Long-term performance suffers when you simply follow a trend. The general rule of investing is “buy low, sell high”. But many people become more motivated to sell assets the more they decline, especially during a market downturn, according to Marks.

He says, “just like those who are afraid of surrendering gains, many investors worry about letting losses compound."

"We know that 'retail investors; tend to be trend-followers, as described above, and their long-term performance often suffers as a result."

Marks further writes 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."

Marks says there "certainly are good reasons for selling, but they have nothing to do with the fear of making mistakes, experiencing regret, and looking bad."

According to the investment guru, 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, rigor and discipline. "