About this video

• Video Title: Selling Out
• Channel: Oaktree Capital
• Speakers: Howard Marks
• Duration: 00:35:57 (35 minutes and 57 seconds)

Overview

This video is a reading of Howard Marks' memo titled "Selling Out," where he discusses the complexities and psychological factors involved in selling appreciated assets. Marks contrasts the simplistic adage "buy low, sell high" with the reality of investor behavior, highlighting that selling decisions are often driven by emotions, a fear of regret, or a desire to "lock in" profits, rather than sound financial analysis. He argues that most selling, whether due to assets going up or down, is counterproductive and that long-term investing and patience are key to wealth creation.

Key takeaways

• The Illusion of "Selling High": The common advice to "buy low, sell high" is an oversimplification. Investors often sell appreciated assets due to fear of losing gains or psychological comfort, not necessarily because the asset has reached its peak value.
• Psychological Drivers of Selling: Many selling decisions are rooted in human behavior, such as avoiding regret (watching gains evaporate) and the desire for realized gains, even if it means reinvesting those profits at risk.
• The Flaws of Selling "Down": It's detrimental to sell assets simply because their price has fallen. This often leads to locking in losses and missing potential recoveries, contrary to the "buy low, sell high" principle.
• Active vs. Passive Investing: The video points to studies showing that average mutual fund investors underperform the funds themselves, suggesting that frequent trading and poor timing decisions (selling losers, buying winners) are detrimental. This is a key reason for the growth of passive investing.
• The Importance of Long-Term Investing: Patient investors who hold for the long run can ignore short-term fluctuations, avoid excessive trading costs, and benefit from compounding. The historical performance of the stock market demonstrates the power of long-term holding.
• "Time in the Market, Not Timing the Market": The video emphasizes that simply being invested for the long term is more crucial than attempting to time market movements. Missing a few key trading days can significantly impact overall returns.
• Mistakes vs. Judgment: Valid reasons for selling should stem from a re-evaluation of an investment's fundamentals and comparative opportunities, not from fear, regret, or the desire to appear busy.

Table

Topic	Tags
Investment Strategy	Selling Assets, Profit Taking, Loss Aversion, Behavioral Finance, Long-Term Investing, Buy and Hold, Market Timing, Passive Investing, Active Investing, Portfolio Management, Diversification, Compounding, Value Investing, Distressed Debt
Investor Psychology	Fear of Regret, Emotional Investing, Cognitive Biases, Decision Making, Psychological Barriers, Overconfidence, Trend Following
Market Dynamics	Market Cycles, Bubbles and Crashes, Liquidity, Volatility, Risk Management, Stock Market Performance, S&P 500, Compound Growth
Financial Concepts	Asset Allocation, Risk-Adjusted Returns, Opportunity Cost, Relative Selection, Fundamental Analysis, Valuation, Transaction Costs, Capital Gains Tax
Howard Marks' Philosophy	Investment Memos, Oaktree Capital, Investing Principles, Wisdom from Howard Marks

The video discusses several cognitive biases that influence investors' decisions to sell assets. One prominent bias is loss aversion, where individuals feel the pain of a loss more intensely than the pleasure of an equivalent gain. This leads investors to sell appreciated assets to "lock in" profits, fearing the regret of seeing those gains disappear, even if the underlying investment still has strong potential.

Another related bias is the disposition effect, which describes the tendency for investors to sell winning stocks too soon and hold onto losing stocks too long. The memo illustrates this with the example of an investment that goes from $100 to $120 (leading to a desire to buy more), then to $150 (increasing confidence), but if it falls to $75, the investor hesitates to average down, and at $50, they want to sell, fearing it will go to zero. This irrational behavior stems from a desire to avoid the embarrassment and self-recrimination of watching a gain evaporate.

The video also touches upon confirmation bias and recency bias, where investors might seek out information that confirms their decision to sell or overemphasize recent price movements (either up or down) when making their choices. The example of the S&P 500's historical performance shows that even with positive long-term trends, short-term fluctuations and the fear associated with them can lead investors to make poor selling decisions, missing out on significant long-term gains.