Every sale raises a series of questions, often surrounding relative values and opportunity costs. What will you do with the proceeds? Do you have something in mind that you think might produce a superior return? What might you miss by switching to the new investment? And what will you give up if you decide not to switch and continue to hold the asset in your portfolio? Or perhaps you decide to sell and don’t plan to reinvest the proceeds. In that case, what’s the likelihood that holding the proceeds in cash will make you better off than you would have been if you had held on to the thing you sold? Selling an asset is a decision that absolutely must not be considered in isolation. — Howard Marks (source)

There are economic agents who make large and predictable mistakes. For example, individuals who invest on their own characteristically make large and expensive mistakes. If we analyse individual transaction in which an individual investor bought a stock and sold another in a single day, it is safe to assume this transaction is not based on liquidity. What determines the individual’s behaviour is the belief that one stock will outperform the other. Now with modern technology we can easily analyse the outcomes of this single-day transaction a year later, and the results are quite astonishing. On average, the stock that a person sold did better than the stock they bought, but it’s not only that it did better — it did better by a large amount. The average is 3.4 percent. These results have been replicated many times over.

This phenomenon leads to a very simple notion: there is an average cost of having an idea for an investor, and the average cost is about 3 percent, which is quite a lot. So, having ideas cost people money, and people have lots of ideas. Individual investors tend to churn their accounts, they tend to trade too much, and that they trade too much seems to be due over-confidence. They believe they know something that they do not know and this is one essential characteristic of human beings, which makes them different from rational beings. — Daniel Kahneman (source)

It was the publication of E.L. Smith’s little book entitled, Common Stocks as Long-Term Investments. His study showed that, contrary to prevalent beliefs, equities as a whole had proved much better purchases than bonds during the preceding half-century. It is generally held that these findings provided the theoretical and psychological justification for the ensuing bull market of the 1920’s. The Dow Jones Industrial Average (DJIA), which stood at 90 in mid-1924, advanced to 381 by September 1929, from which high estate it collapsed — as I remember only too well — to an ignominious low of 41 in 1932.

On that date the market’s level was the lowest it had registered for more than 30 years. For both General Electric and for the Dow, the high point of 1929 was not to be regained for 25 years.

Here was a striking example of the calamity that can ensue when reasoning that is entirely sound when applied to past conditions is blindly followed long after the relevant conditions have changed. What was true of the attractiveness of equity investments when the Dow stood at 90 was doubtful when the level had advanced to 200 and was completely untrue at 300 or higher. — Ben Graham (source)

I used to talk about the crash in October 1987 without explaining what it was and I do still teach a seminar in the economics department in the Fall. I started talking about what happened in October 1987 and I looked around the room and I realized that I think the students were three or four years old in 1987 and weren’t yet reading The Wall Street Journal.

So, just to give you a little bit of context, the crash was really an extraordinary event. According to my calculations it was a twenty-five standard deviation event. One standard deviation happens one draw out of three, two standard deviations one out of twenty, three standard deviations is one out of one hundred. An eight standard deviation event happens once out of every six trillion trials. You can’t come up with a number to describe the twenty-five standard deviation event; it’s just too large a number, I think, for any of us to really comprehend. In essence, this collapse in stock prices — the one-day collapse in stock prices — I think in the U.S. the price was, depending on which index you were looking at, were down 21-22% in a single day. Interestingly, most major markets around the world were off by a similar magnitude. This one-day collapse in stock prices was a virtual impossibility. Of course, this was just a change in stock prices; it wasn’t related to any fundamental change in the economy or any fundamental change in corporate prospects. It was just a financial event. — David Swensen (source)