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December7, 2020 BARRON’S 11
STREETWISE
Even people who buy and sellstocksfor
aliving arenot very good at the selling part,
underperforming substantially,astudy finds.
I Might Stinkat
Selling.A New Study
Shows I’m NotAlone.
A
top Wall Street strat-
egist says we’re six
to eig ht weeks away
from an excellent
time to sellstocks.
But separately, a
study on selling
shows that even professional money
managers stink at it. A notoriously
poor market timer, meanwhile, has
done it again, getting trampledby
bulls last month.
You’ve heard of the Oracle of
Omaha?Think of this guy as the
Whiffer ofWestch ester County,N.Y.
Let’s take those in reverse order:
Greetings fromWestch ester.
I had a foolproof market thesis.
Stocks were sure to dive in November
for three reasons.Virus caseswere
spiking.There was potential for an
election dispute.Plus, stocks looked
pricey after soaringwhile the econ-
omy limped—it ’s not as if therewas
any risk of, say, the S&P 500 index
postingits best November since1928.
So I shifted some money fromstock
index funds to cash.
It turns out that low interest rates
and good ne ws on vaccines are more
important to the market than any of
that otherstuff. The S&P jumped 11%
for the month, the best sinceyou-
know-when. At least I endedup with
a half-bonanza, because I amsuspi-
cious enough ofmy judgment tokeep
from abandoningstocks altogether.
And thank heavens for thevaccines.
It turns out that better investors
than mestruggle with sellingdeci-
sions, especiallywhere individual
stocks are in volved. There is avast
body ofacade mic research onstock-
picking, but little on selling, so a paper
that has been circulating for the past
year stands out.
The founder ofInalytics, a firm that
measures investment skill, along with
researchers from theUniversity of
Chicago, CarnegieMellon University,
and theMassachusetts Inst itute of
Technology, studied more than four
million trades ma de in nearly 800
institutional portfolios from 2000-16.
The tra ders weren’t ham-and-eggers;
their average portfolio sizewas $5 73
million.
“A striking finding emerges: While
there isclear evidence ofskill in buy-
ing,selling decisions underperform
substantially—ev en relative to ran-
domselling strategies,”the research-
ers write.
Think of that.People who buy and
sell stocks for a living aren’t just
unskilledwhen it comes to selling—
they’re the inverse of skilled. These
aren’t ch imps throwing dartsat the
financial pages. They are Ivy Leaguers
sticking darts in painful places.Poor
sellinghurts their returnsby cl ose to
two percentage points ayear, on aver-
age. Compoundedover a career, that’s
a fortune.
It will takemore researchtok now
whyskill in selling is so rare,but
there are some early clu es. There-
searchers report thatportfolio man-
agers in interviews talk about spend-
ing mostoft heir time looking for
stocks to bu y, and regard selling as
something todo to freeup money for
newpurchases.
Perhaps, the researchers theorize,
there is an “asymmetric allocation of
cogniti ve resources”at work—that is,
the portfolio managers are simply
doing far more homework on their
purchases than their sales.There is
supportingevidence for that in the
study: Sales that occurred near com-
pany earnings reports,when portfolio
managers were presumably paying
close attention to fundamentals,were
associated withdecent returns. Sales
that were no where near earnings
reportswere lar gely fl ops.
Previous research from the field
of behavioral research hasshown that
investors tend toward what ’s called
loss aversion.They feel the pain of
losing money moredeeply than the
joy of gaining.That makes them hold
losing trades for too long, so as not
to gi ve up hope, and sell winners too
soon, tokeep good ne ws from turning
to bad.
The sellingstudy, howeve r, showed
something different:Returns were
particularly bad when portfolio man-
agers sold extreme performers, both
good and bad, with relatively small
weightings. It wasn’t tax harvesting at
work, because a majority of portfolios
were tax-sheltered.The researchers
reckon that those particular sales
represent managers simplychoosing
from low-conviction holdings that had
done something big, rather than tak-
ing a more rigorousapproach.
So market timing is hard, and se-
lectingstocks to sell confoundseven
the best.Now, Michael Hartnett, chief
investment strategistat Bank of
America, says investors should get
ready to do a little of both.Vaccines,
he predicts, will bring a mirror image
of this pastMarch, when in vestors
reached maximum pessimism.
“If we’re taking avaccine and
emerging from our caves and traveling
and going ba ck to offices, there will
not be the need for monetary and fis-
cal stimulus,”Hartnett told me this
past week. The rollout ofvaccines will
be unambiguousgood ne ws, of course,
but “in this bizarre place calledWall
Street, it’s likely to create a moment of
peak positioning,”he sa ys.
W
e’re not thereyet. Hart-
nett sa ys that after an-
other six to eight weeks,
or 6% to 8% moreup-
side for thestock market, the time will
be rig ht for in vestors to favor ha vens.
He recommendsoverweighting cash,
inflation-protectedTreasuries, and
defensive stocks with sturdy divi-
dends, including utilities, consumer
stap les, and some real estate invest-
ment trusts. Gold, he says, will look
good, too, after a pause to digest the
cash it has attracted of late.
But be prepared to be nimble.As-
sets like these“obviously work much
better if there is asust ained down-
side,”Hartnett says. “I think more
likely what you’re moving into is just
a veryvolatile, fat trading range.”
Good luck to tactical investors who
wish to follow thatadvice. I try to
limit my market-timingattempts to
one a decade, and to offset the inevita-
ble drag onmy returnsby writing
about my shame for money.The S&P
500 trades at 23times the record
earningsgenerated in 2019, which
indeed seems pricey.But if I sold
again no w, I’d probably miss out on
the bestJanuary forstocks since the
days of DutchEast In dia. Even the
Whiffer ofWestch ester knows when
to walk away.B
email: [email protected]
Barron’s Streetwise
In aweeklypodcast byBarron’s,columnist Jack Houghlooks
at thecompanies, people ,and trends youshouldbe watching.
This is Wall Street likeyou’venever heardbefor e. Subscribe
to Barron’s Streetwise on Spotify, ApplePodcasts,
or your favorite listening app.
BARRONS.COM/PODCASTS
By Jack Hough
30 BARRON’SDecember7, 2020
“Youhave
mortgage-and
student-debt
forbearanceand
evictionbansall
endingatthe
endoftheyear.
Ifthisleadstoa
waveofmissed
payments,
defaults,and
evictions,it
couldeventually
spillover
intoanother
financialcrisis.”
StephanieKelton
Photographby
MIKEMCGREGOR
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