The decision to sell a stock is, in many ways, trickier than the decision to buy. My own observation is that investors in common stocks should never be conditioned to sell outperformers. There is a time to fold ‘em. But its not simply because their price has outperformed the market or some benchmark.
When I started investing just over 50 years ago, I read that over the long-haul stocks outperform bonds. Over the years, with all the ups and downs of the stock market, I’ve never had any reason to doubt that. But, the majority of publicly traded U.S. stocks underperform Treasury bills. That doesn’t mean you have to identify the next Magnificent Seven. The vast majority of wealth creation comes from a reasonably sized cohort of successful companies
There will be significant fluctuations in the price of individual stocks in one’s portfolio, but this is background noise. Against this noise the investor must monitor their portfolio to detect signs that the superb companies in their portfolio have not or are not deteriorating in character and quality. Where quality has deteriorated, the investor should not hesitate to sell.
Behavioral inefficiencies are likely the most enduring because human nature has not changed much over time and is unlikely to change much in the future.
We think the very term ‘value investing’ is redundant.
One apportions investment positions or portfolio weightings according to one’s informed estimate of each stock’s probable return; it is the weighting that provides the highest geometric mean of outcomes; betting your beliefs.
The single greatest misapprehension I’ve seen by common stock investors in recent years, including many professional money managers, is to misunderstand the impact of company investment in intangibles of lasting value.
The world has changed. The biggest shift in the world of business in the last forty years has been the swing in company capital investment away from tangible assets and towards intangible assets. This has had a major impact on metrics such as earnings, price/earnings, book value of equity, ROC, ROE, CAPE and several others.
After being retired for 20 years, we have the opportunity of enjoying a much lower tax rate on the same average dollar amount of investment returns. When our investments are passed on to our children there will be no one-time full marginal rate tax to pay.
Kahneman is telling us that an ordinary person might, without being thought silly or irrational or cowardly, reject the single bet but decide to take on the 100-bet game.
By timing we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.
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