When should you sell?

Luffy D Wealth joined discussion · Jan 18, 2022 01:11

This column is inspired from reading a memo by OakTree's Capital Co-Founder Howard Marks on "Selling Out". I have listed down key learning points from his sharing. I hope that this sharing will benefit everyone in their journey in investing.

Oaktree Capital Co-Founder Howard Mark

Starting Point: Buy Low Sell High

This is the most basic/common sense of the discussion. In our human instincts, we want to make money and the most easy way to do it is to buy it at $1 to sell it at $100. However, is it that easy to do?
Very often, simple solution make sense and it is too generalised to have any insights.

Understanding Human Nature: The Need To Take Action.

During the height of the COVID-19 pandemic, we seen people all over the world rushing towards supermarkets such as $Costco(COST.US)$ $Walmart(WMT.US)$ to stock on things like toilet paper, instant noodles etc. This is because very humanly, we NEED to do something to solve something. However, an issue like COVID-19 is clearly out of any individual's hands and actions like these becomes hilarious.

Though the concept is simple to hold it to $100, Howard talks about his observation that people equate activity with adding value. As a result, it is not easy to just "hold" these quality companies as no other actions are taken.

Example: $Amazon(AMZN.US)$

One of the classic example used is Amazon. Consider Amazon who IPO at $5 in 1998 and is now $3242 today.

Would you have taken profit at $85 (1999) - 17x in 2 years?

Sell at $6 (2001) during the bubble?

Or sold at $600 (2015) - 100x since 2001?

It is very tempting to take profit at the moment of time. In hindsight, it might not have been the most profitable thing to do?

So why do people sell out?

(A) When share price goes up.
People sell when share prices goes up because they want to REALISED their gains. They are afraid that their gains will be gone if they don't do it NOW. Talk about loss aversion.
(B) When share price goes down.
People generally are afraid of letting their losses compound and if share price goes beyond a certain threshold, they will sell. That's what we have been seeing on $Alibaba(BABA.US)$ at the moment of time.