You ever played, “Would you rather?”
My kids do sometimes. It gets gross—fast.
It goes like this:
- Would you rather lick the bottom of a shoe or lick the kitchen sink?
- Would you rather eat moldy bread or eat a rotten apple?
I’ll spare you the gorier ones. You get the idea.
In a recent conversation at Oaktree, Howard Marks, who’s known for his investment memos, answered a similar kind of question about which was worse: buying high or selling low.1
Though it wasn’t framed as a Would You Rather…it could have been.
Marks admits that an investor will have regret when buying too high if the market falls soon after; however, since the long-term trend of markets has been to move up over time, investors should avoid getting in and out of securities or getting out and staying out. He gives an important investment principle: selling at the bottom is the “cardinal sin of investing.”
According to Marks, it seems one should favor the "sin” of getting in and being wrong in the short-term over the “sin” of getting out and being wrong in the long-term.
Some investors are allergic to investing in what they perceive to be high markets. They wait for a pullback. Sometimes it comes. Sometimes it doesn’t. Lots of times they just keep waiting.
Surprisingly, as JP Morgan has shown in the above chart, between 1988 and 2020, cumulative returns of investing on days where the market hit all-time highs were better than investing on other days of the week.2
This appears counterintuitive at first, yet reminds us that buying low and selling high is harder than you think.
One of the reasons is that the market can become a self-fulfilling prophecy of sorts. When it’s going up, buying is contagious, attracting more buyers, and the market can head much higher than anyone expects. On the other hand, when it keeps dropping, selling can become infectious and the downtrend worsens.
Good luck guessing the timing right.
It might be that focusing more on the buying part than the selling part is generally the prudent course of action.
All of us want to sell at the perfect high and buy at the perfect low, but your chances of finding Bigfoot in them thar hills may be the same.
- Insights Live: Which Way Now? A Conversation with Howard Marks (August 9, 2022). Accessed online: https://youtu.be/JrTCOLiIcE0
- Is It Worth Considering Investing at All Time Highs? Accessed online: https://www.jpmorgan.com/content/dam/jpm/securities/documents/cwm-documents/Is-it-worth-considering-investing-at-all-time-highs.pdf (August 28, 2020), page 4.