Howard Marks: After Significant Gains Take A Little Off The Table

In this interview with Global Money Talk, Howard Marks discusses the importance of flexibility over rigid rules in investing. He uses the example of a stop-loss order, which limits potential losses but may cause investors to miss out on future gains.

There are no perfect rules that guarantee both safety and success. Marks advises taking some profits after significant gains (“taking a little off the table”), while acknowledging the trade-off: securing profits means missing out on future potential growth.

Ultimately, each investor must determine what strategy works best based on their financial situation, personality, and tolerance for risk.

Here’s an excerpt from the interview:

Marks: There’s an old saying – Rules are made to be broken. You can have general policies, but I think it’s important to be ready to break them as necessary. A great example is some people adopt a rule that if you buy a stock and it goes down x percent, you should sell it. It’s called a stop-loss order.

For example, let’s say you decide that if a stock goes down 10%, you’ll sell it. What does that mean? It means that if you sell every stock that goes down 10%, you’ll never lose 20%, 30%, or 40%. But every once in a while, you’ll have a stock that goes down 30%, you’ll sell it, and then it’ll go up 100% from there—and you’ll miss all of those too.

There is no rule that you can set to help you negotiate that. It’s not down 10% or down 20%. There’s no automatic rule that will keep you safe but not result in you missing opportunities.

I’ve always taken the approach that if you have a great success, you should sell some—we say, “take a little off the table”—in order to capture some of the gain. So if it turns out to be fleeting, you won’t give it all back. But if you buy something, it goes up 30%, and you sell some, that means if it goes up 60%, that part you sold won’t benefit from the additional rise.

It’s not that the rule is wrong or right. The question is whether it’s right for you, right now. The stop-loss order, for instance, prevents great losses, but it also causes you to miss some successes. You have to decide what’s more important based on your financial situation, your personality, and other considerations.

My idea of taking a little off the table. If you buy something, it goes up 30%, you sell some. If it goes up another 30%, you sell more. Another 30%, you sell again. While you would have made more money if you held on, if it went up 30% and then back down, you would have failed to lock in any of the profits.

The reality is you can’t do both. You can’t secure part of your profit and let it all ride. Every person has to work out for themselves what’s right for them. You can’t do this stuff perfectly, but the key question is: What is the definition of good for you?

You can watch the discussion here: