It just made me sick what happened to one of the oldest members of our board (in duration, not age). He got very scared and sold out of all of his positions at a considerable loss year-to-date, when the market was near its bottom for our stocks, and then got back in with a third of his money yesterday, just at the wrong moment.
It must be very frustrating for him. My stocks are all down today too, but I had the cushion of being up 32.3% year-to-date as of yesterday’s close.
As I tried to explain to the board, that is the big problem with getting out. You have to make two correct decisions and each is counter-intuitive. If you follow your emotions and get out at the bottom when everyone is saying “Sell”, you then watch your stocks going up, up, up, and finally your emotions tell you that you can’t stand it any more, and you risk getting back in just when your stocks are making a temporary top and are poised to take a rest and back up.
I PERSONALLY, JUST CAN NOT DO IT CORRECTLY, so I stay in. It just works better.
Not my words (see below), but certainly something worth reading and re-reading as a daily ritual during these turbulent times in the market. At the end of the day, convince yourself into having market courage on down days. Buy something! You would be incredibly surprised by how great it feels and how much anxiety levels drop when you make an educated purchase on a really bad market day…even a small one!
From the Howard Marks April memo:
“Terrible news makes it hard to buy and causes many people to say, “I’m not going to try to catch a falling knife”. But it’s also what pushes prices to absurdly low levels. That’s why I so like the headline from Doug Kass that I referred to above: “When the Time Comes to Buy, You Won’t Want To.” It’s not easy to buy with the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor’s greatest aspiration.”
Personally, I just bought a small crumb of AYX and NET a little bit ago to exercise my right to buy something on sale and make myself feel better.
Thank you for this timely post. I have evidently fallen into the “Wash Sale” trap. In short, if you decide to sell out of a position (stop loss) you cannot safely reinvest for 30 days. If you think a stock will recover within 30 days… you should not sell.
I’ll try to remember this when I have funds freed up to invest again.
If anyone has a good recommendation on how to avoid the “wash sale” pitfall, please let me know.
While this is OT, it may be helpful to others… so let me share my last few weeks experience and actions…
I held tight through first few days of drop and then got a bit worried and bit greedy thinking if I raise cash, I feel safer and can come back in at a lower prices… so I looked to raise cash exactly at the wrong time… Fortunately, I was deliberate in raising only small amount and then turned my thoughts into which companies will do better through shut downs and more importantly coming out of these shut downs.
But that took me through unfortunate whipsawing between trying raise cash out of my then largest holding AYX and get back on then (and now) high valuation, high momentum ZM, just before its security FUD started to take root… long story short, I sold portion of my AYX at around $80, bought ZM at >$130 and then sold ZM at ~$110…
That whipsaw cost me ~5% to 7% of portfolio specially with AYX right back up from $80 to $120…
Thankfully focusing on future - which companies will do better through shut downs and more importantly coming out of these shut downs, and not have their potential upside already priced in - I started aggressively moving into CRWD, LVGO and ROKU… with great rebound in these stocks in last 10 days, I am back to positive 8% YTD as of mid day today… so its much better than average market (though no where near some of the elite members returns on this board…), but if I held through my portfolio that was on 1/1/2020, I would be ahead by full 5% compared to where I am today… and I would have less drawdown and not cashed some capital gains on which I will end up paying tax next year.
The point is to reiterate Saul’s advise, don’t get sold out at the worst moment. Also to avoid this happening, to hold your emotions through difficult times, hold cash for 6 to 12 months living expenses in separate account so you are not forced to take action… and yes, minimize action, keep it small and deliberate and you will do very well.
Thank you for this timely post. I have evidently fallen into the “Wash Sale” trap. In short, if you decide to sell out of a position (stop loss) you cannot safely reinvest for 30 days. If you think a stock will recover within 30 days… you should not sell.
At the dual risk of (1) taking this already OT thread farther OT, and (2) sounding like a dummy*, I don’t see what the big deal is about the wash sale “trap”. Unless the purchase is inside something like an IRA, the loss you don’t get on this year’s taxes gets added to the cost basis, reducing the (hopeful) capital gain when you sell without a wash sale. Yes, if your purpose was loss harvesting you are out of luck, at least in the short term, but if your purpose was to invest differently, well so what?
*(All my investing has been within IRA and ROTH accounts)
Hopefully this doesn’t violate board rules (i.e. you could google wash sale rules).
You can buy and sell stock any time you like. However, if you have a loss and want to declare it on your taxes then you have to wait the 30 days to avoid the wash sale.
If you have a gain on the stock you sold then the wash sale does not apply.
Feelings almost always trump data when dealing with money but this relationship is amplified even more than usual during a crisis.
This decision is more psychological than spreadsheet in nature.
…Every investor assumes stocks will fall out of bed immediately following their lump-sum purchase like the market is out to get them.
Most investors will feel far worse about seeing stocks fall after investing a lump sum than they will feel good about seeing them rise.
…This is the type of decision that invites regret no matter what you do. I love the idea of splitting up your decisions because it gives you the opportunity to always be a little right and a little wrong all at the same time.
The thing you absolutely don’t want to do is become so attached to your cash that you never get back in. Cash is comfortable in a bear market but if you get stuck there, as so many investors did in 2008 and 2009, you will regret it someday.
The one thing to remember is no one perfectly times these decisions.
In a recent memo, Howard Marks wrote, “The investor’s goal should be to make a large number of good buys, not just a few perfect ones.”
Thank you for this timely post. I have evidently fallen into the “Wash Sale” trap. In short, if you decide to sell out of a position (stop loss) you cannot safely reinvest for 30 days. If you think a stock will recover within 30 days… you should not sell…
These rules need to be revised a little:
If you sell at a loss, you cannot reinvest within 30 days without triggering the wash rule, which denies capture of the loss at the time of sale.
If you reinvest within 30 days, you can adjust your new basis to account for the prior loss, just making use of the loss in a different way.
Just think in terms of a general rule that you never lose a capital loss, but you can waste it if you’re not careful!
I want to thank everyone who responded to me about wash-sale pitfalls. You have all been generous in helping me. Thank you all. I will sit on my hands and ride the market in trusted stocks. I will have to sit on my hands to avoid selling and buying into positions within these trusted stocks too quickly.
I just reentered market as an investor and read all the doom and gloom. I sold half of holdings to go cash, then we took off again, so I’m listening to Saul and look 3-5 years out on everything
On another note, my pizza friends DPZ and PZZA are having record weeks, all time records, so I expect DPZ to come in pretty good on the earnings report 4/23. Pizza for thought, pizzadude
Saul,
Great thread even though OT. I wanted to share my experiences for everyone’s benefit. I generally stay fully invested and avoid selling due to macro reasons. I recently took stock on how my buy/sells have helped my overall portfolio gain:
From 1/1 to today my trades have helped add 6.4% to my ytd gain.
From 3/16 to today my trades have lost me -3.3%. So, instead of being 18.9% up for 2020, I am up 15.5%. Not complaining for sure, but I wanted to know why.
All my losses occurred between 3/16 and 3/25. This was a low period of the market and during this period apparently I was selling more than buying. I was trying to hold on to my cash a little longer in the hopes of buying at a lower price. All my sells were for valid reasons - slowing growth or position got too big, or lower confidence positions. But yet the fact that I held on to my cash a little longer instead of redeploying right away in higher confidence positions cost me 3.3%! Of course if the market had continued to tank and had I got a chance to redeploy it at even lower prices I might have come out ahead.
But yet the fact is during that period I was indirectly timing the market regardless. It seems to me when it comes to market timing there is always an equal chance of things going either way and that sounds like a gamble. Yet, one constantly hears of people building up their cash position to buy the dips. Even now the sense is market has gone up too high too fast, we are in for a leg down, let us get some cash to redeploy! I am curious how successful that type of investing strategy has worked out over time.
I am curious how successful that type of investing strategy has worked out over time.
The following data is for an investment of $10,000 made on January 01, 1980 through and including December 31, 2018…comparing staying in the market versus being in and out of the market:
The value of $10,000 as of 12/31/18 if invested on 01/01/80:
$708,143 Staying in the entire time
$458,476 Missing the Top 5 days of the market
$341,484 Missing the Top 10 days of the market
$135,226 Missing the Top 30 days of the market
$ 62,342 Missing the Top 50 days of the market
source: [https://www.thesimpledollar.com/investing/stocks/tempted-to-...](https://www.thesimpledollar.com/investing/stocks/tempted-to-sell-missing-just-a-handful-of-the-best-stock-market-days-can-tank-your-returns/)
As I tried to explain to the board, that is the big problem with getting out.
That’s one way of looking at it. The other way of looking at it is that this is the problem with holding extremely highly valued stocks and/or holding stocks when the market is extremely highly valued.
How many people can hold through the pain of the 50-60% decline that generally follows in that situation?
The following data is for an investment of $10,000 made on January 01, 1980 through and including December 31, 2018…comparing staying in the market versus being in and out of the market
Yes, I have seen that type of data set. But folks who believe in bumping cash up periodically believe that they will miss some of the biggest dips and better still have cash to redeploy at that time. Remember we are not talking about going to all cash. Just cutting position sizes and going to say 20% cash max. Think back to 7/26/19. Most of our ports hit ATH. Some might have exceeded that in Feb. this year (thanks mostly to ZM!). So, as the SAAS stocks got frothy in July last year it would have been prudent to reduce some position sizes and build a bigger cash position so that you could have redeployed that in Fall. Of course, that is hindsight but I did feel it was frothy back in July last year but yet did not act on it. I am curious to know if folks have evaluated the efficacy of the variable cash position strategy. I know Bear for example varies his cash levels a fair bit.
Since psychology so important on this issue, I will share a trick I use on myself to stay invested long term: I remember that the government is spending gargantuan sums of paper money which must result in devaluing the currency, and the phrase, cash is trash. Better to own stuff as we emerge from whatever happens. Cash will buy less enterprise in the end. Don’t know if this true, but works for me:)
I am curious to know if folks have evaluated the efficacy of the variable cash position strategy. I know Bear for example varies his cash levels a fair bit.
Folks, let’s end this please. It’s off topic.
For me, it’s not a “strategy.” I consider my cash balance more of a bug than a feature – it rises as I trim positions (often because they’re starting to look expensive), which I do in small increments (The less we can be “all or nothing” investors, the better. You can go somewhat to cash without going all to cash.) and can’t find anything to buy with the proceeds. But I’d always rather have a bunch of attractively priced growth stocks than cash.
Also, cash helps me sleep at night in rocky times. I don’t consider this a strength or something that serves me more often than not. It’s just the way it is.
Again, let’s please end this here. Any other questions, email me off-board.
How many people can hold through the pain of the 50-60% decline that generally follows in that situation?
First of all, 50-60% is a bit extreme don’t you think? But I’ll let Charlie Munger chime in:
"…if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
Admittedly, very few have mental wiring that resilient but 20-30% drops are much more common and will be encountered quickly by almost any investor. Historically speaking, the math is always in your favor if you simply have the time to wait it out. In almost every one of these instances, those that time it right are heavily outnumbered by those who get it wrong. You are battling investing psychology whether you stay in or out. Why not choose to battle the psychology that has been historically proven to show better returns?