AmplifiedVolatility 65nities for wider price-value gaps, the economic characteristics have
deteriorated, or management has changed hands for the worse.
The famed investor Gerald Loeb gave the opposite advice, which
is not easy to follow in the best of circumstances, much less when
contemporary advisers are telling you something else: “If you want
to sell some of your stocks and not all, invariably go against your
emotional inclinations and sell first the issues with losses, small prof-
its, or none at all. Always get rid of the weakest and keep your best
issues for last.”^24
Like Loeb, Peter Lynch regards the prevalent practice of rebal-
ancing as backward, saying it is like gardening by watering the weeds
and pulling the flowers. The beneficiaries of this backward gardening
are not the investors or traders who do the rebalancing but their
advisers—who generate fees from trading—and the U.S. federal and
local treasuries—which get tax payments. Buffett put it best in ask-
ing whether it would have made sense for the Chicago Bulls to trade
Michael Jordan on the grounds that he had become too important
and valuable to the team.^25
Apart from the stupidity of trading the best picks, the strategy’s
contribution to trader volatility is significant. When trades are made
to rebalance a portfolio in this way, they are by definition trades un-
related to business value (other than fortuitously). The sale of stock
that no longer “fits” a portfolio puts price change pressures on that
stock. But that pressure, having nothing to do with actual or even per-
ceived value in that stock, simply widens the price-value gulf.
Finally, plenty of people have turned to the stoc kmar ket as a
savings account. It is the place where they repose regular sums to
build wealth for planned projects such as buying a home, paying for
a child’s education, and enjoying retirement. It is also the place
where money is stored and drawn on for unplanned funding needs,
such as paying to remodel a kitchen, buying a sports utility vehicle,
and taking trips to exotic vacation spots.
It is hard to quarrel with those who use the stoc kmar ket as a
way to build wealth for planned future needs such as home owner-
ship, education, and retirement. These tend to be long-term goals
that enable long-term investing, and so the stoc kmar ket is a rational
place to store some of that wealth.
It is far easier to rebuke the use of the stock market for more
short-term-oriented expenditures. For one thing, there is extraordi-
nary ris kin stoc kmar ket investing, especially over short periods of
time. It is simply not a rational place to put resources that may be