Palace/Workshop

Long-Term Compounding vs Market Timing

investingcompoundingmarket-timingsellingbehavior

Long-Term Compounding vs Market Timing

Howard Marks' 2022 memo "Selling Out" argues that investors often sell for psychologically satisfying reasons rather than analytically valid ones. They sell because an asset is up and they want to lock in gains, or because it is down and they want to avoid regret. Both can be mistakes.

Bad Reasons to Sell

  • The asset has risen a lot.
  • The asset has fallen a lot.
  • A temporary market dip might be ahead.
  • The investor wants to avoid embarrassment or regret.
  • The investor wants to "take profits" without a better use for the proceeds.

Better Reasons to Sell

  • The investment thesis has weakened.
  • The probability-weighted outcome has deteriorated.
  • A better risk-adjusted opportunity exists.
  • The position has become too large relative to risk tolerance.
  • Liquidity needs or fund structure require sale.

Marks' core point is relative selection: every sale produces cash that must be held or reinvested. The selling decision is incomplete until the alternative use of capital is judged.

Sources