by Tom Bradley

In the fall, I wrote an article entitled, Is it time to raise cash? I closed it by saying, “I encourage you to be guided by the purpose of the money as opposed to a hunch on where the market is going. You’ll make fewer unforced errors that way.”

Last week, Howard Marks of Oaktree Capital dedicated his letter to selling and the mistakes investors make. He says, “... there are two main reasons why people sell investments: because they’re up and because they’re down. You may say that sounds nutty, but what’s really nutty is many investors’ behavior.”

Mr. Marks’ letter has been re-published in the Financial Times and is well worth a 10-minute investment in time, particularly if you’re an investor who is tempted to try timing the stock market.

Here are a couple of nuggets from the letter.

On selling when an investment is up to “put a gain on the books”, he says “... it’s usually a mistake to view realized gains as less transient than unrealized ones (assuming there’s no reason to doubt the veracity of the unrealized carrying values). Yes, the former have been made concrete. However, sales proceeds are generally reinvested, meaning the profits – and the principal – are put back at risk. One might argue that appreciated securities are more vulnerable to declines than new investments in assets currently deemed to be attractively priced, but that’s far from a certainty.”

On selling because a stock is down, he concludes, “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.”

Mr. Marks’ piece underlines the fact that selling is an underrated skill in investing. It’s also an area where investors act less rationally.