The Real Challenge of Active Investing
Knowing When to Sell
In the world of investing, there’s an old saying about the key to success: “buy low, sell high.” Buying stocks – finding that next great company at a bargain – gets most of the attention. But far less discussed, and arguably far more difficult, is the second part of that mantra: knowing when to sell. This is where many active investors stumble. In a roaring bull market, almost any stock pick can look like a stroke of genius – after all, when prices keep rising, everyone’s a genius in a bull market. The real test of an active stock-picker’s skill comes when the market tide turns or a high-flying stock loses altitude. It’s at that moment investors face the critical question: now that I’ve bought this stock, when do I sell?
This two-part blog series explores why selling is the Achilles’ heel of active investing and stock picking. In Part 1, we’ll dive deep into cautionary tales – including the rise and fall of star stock-picker Cathie Wood – to illustrate how failing to sell at the right time can erase even the most spectacular gains. We’ll explain key concepts like idiosyncratic vs. systematic risk in plain language, so that even if you don’t have a background in financial jargon, you’ll grasp why selling decisions are so crucial.
In Part 2, we will examine how focusing on systematic risk through diversification can spare you the agony of these selling dilemmas – but for now, we’ll stick to diagnosing the problem. So, let’s explore why the toughest decision in investing is often when to hit the sell button, and what can happen when you get it wrong.
Buying Is Easy in a Bull Market, But Selling Is Hard
In a prolonged bull market, buying stocks can feel almost too easy. When markets are rising steadily, you can buy almost any reasonably well-known company and watch your investment grow. If that bull market lasts long enough, even average stock picks tend to go up along with the broader tide of economic growth and investor optimism. This environment can breed overconfidence. Investors may start to think they have a special talent for picking winners, when it’s really the market’s upward momentum that’s doing the heavy lifting. It’s during these euphoric times that many forget to plan for the inevitable question: At what point (if ever) should I sell my winners?
As billionaire Mark Cuban quipped, “Everyone is a genius in a bull market.” The true differentiation between an average investor and a great investor often only becomes clear when the market transitions to a bear market. In other words, how you think and act during bear markets (when prices fall) reveals your investing prowess far more than the easy gains of a bull run. Selling requires confronting hard truths: Is this stock’s run over? Has its price outrun its fundamentals? Could my money be better invested elsewhere? These are uncomfortable questions – and many investors simply don’t answer them until it’s too late.
Even legendary investors admit that selling is far more challenging than buying. Joel Greenblatt – a highly respected hedge fund manager and author – put it bluntly: “Selling actually makes buying look easy… Buying kind of makes sense. But selling – that’s a tough one. When do you sell? The short answer is – I don’t know.” While one can identify good reasons to buy a stock (it’s cheap, it has growth potential, etc.), the decision to sell is often murkier and laden with psychological pitfalls. Let’s explore why selling is such a thorny part of the investment process, and then we’ll look at some high-profile examples where getting the sell decision wrong proved costly.
The Psychology of Selling: Why Is It So Difficult?
Several human biases and emotions make selling an investment much harder than buying one:
Fear of Missing Out and Greed: If a stock you own has been soaring, it’s tempting to keep holding for “just a little more” gain. Greed can whisper that selling means potentially leaving profits on the table. On the flip side, when a stock is plunging, fear can paralyze you from selling because you hope it will bounce back. No one wants to sell at the bottom. This tug-of-war between fear and greed often leads to holding a stock too long, either on the way up or the way down.
The Disposition Effect (Holding Losers, Selling Winners): Behavioral finance researchers have documented a common investor bias: people tend to sell their winners too early and hold onto losers too long. Why? We love locking in gains – it feels good to take a profit – and we hate admitting a loss – selling a loser makes a paper loss real, which is painful. Psychologists call this the disposition effect: investors have a “disposition” to sell winners quickly (to boast a realized gain) and to stubbornly ride losers in the hope they eventually recover. Unfortunately, this often hurts performance. Many investors end up selling stocks that might continue rising, while retaining poor performers that continue to languish.
Regret Aversion: People are wired to avoid regret. Selling a stock can induce regret in two distinct ways: if you sell and the stock keeps climbing afterwards, you’ll regret selling too soon; if you hold and the stock later crashes, you’ll regret not selling earlier. To dodge this emotional minefield, investors sometimes delay any decision at all – effectively choosing to hold by default. As famed investor Howard Marks wryly noted, “What could cause an investor more self-recrimination than watching a big gain evaporate?” That fear leads many to sell prematurely just because an investment is up, to “lock in” the gain and avoid the pain of possibly seeing it disappear. Yet, paradoxically, others do the opposite – they hold their winners too long out of overconfidence, then watch gains evaporate when the market turns. There is no easy answer, which is exactly Marks’s point: selling is an inescapable part of investing, but one to which far less attention is paid than buying.
Lack of Strategy or Signals: Unlike buying – where you might have a target entry price or clear rationale (e.g., “I’ll buy if the stock falls to X” or “I’ll buy because I believe in the company’s next product”) – selling often lacks a plan. Many investors don’t set an exit strategy at purchase. Professional traders might use stop-loss orders or valuation targets to guide sells, but many individual investors and even long-term fund managers simply ride positions until something forces a decision (a huge drop, a takeover, etc.). Without predefined criteria, the sell decision becomes a highly emotional judgment call made on the fly. It’s no wonder mistakes are common.
In short, we humans are not naturally wired to execute the “sell high” part of buy low, sell high. It requires cold rationality and sometimes going against our instincts. To see how damaging a poor sell (or non-sell) decision can be, let’s look at some cautionary real-world examples.
Cautionary Tale #1: Cathie Wood’s ARK – Riding the Rollercoaster Up… and Down
One of the most striking recent examples of the perils of not knowing when to sell is the saga of Cathie Wood and her ARK Invest funds. Cathie Wood became a superstar fund manager virtually overnight in 2020. Her flagship ARK Innovation ETF (ticker: ARKK) focused on “disruptive innovation” – basically, concentrated bets on high-growth, speculative tech companies that she believed were the future (think Tesla, Zoom, Roku, Coinbase, Teladoc and the like).
During the bull market of 2020-2021, this strategy paid off spectacularly. ARKK soared nearly 150% in 2020 alone, as ultra-low interest rates and a frenzy of risk-taking drove investors into tech stocks. Wood’s stock-picking seemed uncanny; her fund was all the rage in 2020 and 2021 and attracted massive attention and money from investors. In fact, ARK Invest saw roughly $30 billion of new investor inflows in that period, much of it pouring in near ARKK’s peak as people chased those eye-popping returns.
However, this fairy tale did not have a happy ending for many of Wood’s investors. The problem wasn’t her buying – it was her lack of selling. Wood’s conviction in her picks was so strong that she held onto them even as they reached stratospheric valuations, and even as storm clouds gathered in late 2021. When the tide turned, ARKK and Wood’s other funds gave up their gains with alarming speed. In 2022, as interest rates rose and the speculative tech bubble deflated, ARKK plunged 67% from its peak. Many of those “disruptive” darlings crashed hard: for instance, telehealth company Teladoc, one of ARKK’s top holdings, fell from around $300 a share in early 2021 to below $30 by 2022 – a 90% collapse.
Morningstar, the investment research firm, later did a sobering analysis: ARKK remains down over 70% from its record high, and the ARK family of funds collectively “destroyed” an estimated $14.3 billion in investor wealth over the past decade. In fact, ARK Invest topped Morningstar’s list of “biggest wealth destroyers,” having cost investors more than double the losses of the next worst firm on the list. What makes this particularly striking is that this wealth destruction occurred during a generally favorable market – the S&P 500 and Nasdaq were mostly rising over that time. As Morningstar put it, “These funds managed to lose value for shareholders even during a generally bullish market.” In other words, had those investors simply bought a diversified index (more on that later) and held on, they likely would have done fine. But by entrusting money to an active strategy that didn’t exit its high-flying positions in time, they ended up with severe losses.
Cathie Wood’s refusal to significantly trim or sell her winners at the peak turned a triumph into a tragedy. ARKK’s total return since its 2014 inception is still less than half of the Nasdaq-100’s gain in the same period, despite all that early success. For many investors who jumped in late 2020 or early 2021, nearly all the paper profits evaporated. As one analyst noted, ARK Invest provides a “valuable case study in how not to invest” – a reminder that stock picking with concentrated bets can go very wrong if you don’t manage the downside or have an exit plan.
To be fair to Wood, her stated strategy is long-term and high conviction – she believes in eventually selling far in the future, not during temporary setbacks. However, this stance itself is a philosophy on selling: essentially, don’t sell unless you absolutely have to. It’s an “all or nothing” approach that can work for some (if the companies truly fulfill their disruptive promise over many years), but as we’ve seen, it can also lead to gut-wrenching volatility and long stretches of underperformance. For high-net-worth investors or advisors watching ARKK’s journey, the takeaway is clear: Spectacular gains mean little if you don’t (or can’t) capture them by selling at some point. Riding a stock (or an active fund) all the way up and then all the way down is a round-trip nobody wants.
Cautionary Tale #2: The Dot-Com Bubble – When Great Companies Don’t Revisit Old Highs
The late 1990s dot-com boom provides another classic lesson in the importance of selling (or conversely, the danger of not selling in time). Consider Cisco Systems, a superb technology company that remains a dominant player in networking equipment to this day. In the 1990s, Cisco was growing rapidly as internet usage exploded. Between 1995 and 2000, its revenues surged 850% (from $2 billion to $19 billion), and its stock price went on an even more dramatic ride – skyrocketing 3,800% in those five years. By March 2000, Cisco was the most valuable company in the world, with a market capitalization exceeding $500 billion. Optimism was so rampant that Cisco’s 1999 annual report literally urged investors to “Capture the Momentum.” And indeed, many investors did pile in near the peak, convinced that Cisco was a must-own cornerstone of the new internet era.
But then, the dot-com bubble burst, almost overnight. From its March 2000 peak of around $79 per share, Cisco’s stock plummeted 88% to about $9.50 by late 2002. This collapse was not because Cisco’s business imploded – in fact, the company’s revenues remained around $19–22 billion in those years, barely skipping a beat. The problem was that investors’ euphoria evaporated; the market dramatically repriced Cisco’s future growth prospects once the internet hype died down. The stock’s valuation (the price people were willing to pay per dollar of earnings) shrank drastically.
For investors who did not sell Cisco at or near its peak, the consequences were severe. Decades later, Cisco’s stock has never revisited that 2000 high of $79. Even though Cisco kept growing its sales (to $52 billion by 2022, more than double its 2000 revenue), the stock in 2023 still hovered in the $50s. On a total return basis (price plus reinvested dividends), it took 20 years for an investor in Cisco to break even from the 2000 crash. Imagine: an investor who held on from the top needed two decades just to recover their losses, despite the company itself remaining profitable and growing! Many dot-com era darlings fared even worse – some went bankrupt, others never regained a fraction of their peak value. Cisco stands out as a survivor of that era, and yet even it serves as a cautionary tale that a great company is not always a great investment if you overpay or fail to manage your exit. Without selling in time, extraordinary gains can vanish and never return in an investor’s lifetime.
The broader NASDAQ market index, loaded with tech stocks, fell about 78% from 2000 to 2002 and famously took around 15 years to fully recover. Diversified investors who held broad index funds eventually saw new highs, but those who were concentrated in a few hot tech stocks might have never recovered. The lesson: Active investing often means taking on idiosyncratic risk (e.g., sector or company-specific risk), and if you pick wrong or don’t sell at opportune moments, you can suffer very long periods of underperformance or permanent loss. As we’ll discuss later, spreading your bets can mitigate this – but if you’re concentrated, the sell decision on each holding becomes critical.
The Cost of Poor Sell Decisions – By the Numbers
It’s not just famous fund managers or bubble-era speculators who struggle with selling; the evidence shows that average investors also consistently hurt themselves with bad timing on sells and buys. Studies on investor behavior have found a striking pattern: the average mutual fund investor underperforms the very mutual funds they invest in. How is that possible? Essentially, investors tend to buy high and sell low. They pour money into funds after those funds have had big run-ups (near the peaks), and they yank money out after a fund has done poorly (often near the bottom), thus locking in losses and missing out on recoveries. In one vivid explanation, Howard Marks noted: on average, mutual fund investors tend to sell the funds with the worst recent performance – right before those funds rebound – and chase into funds that have done the best – right before those hot funds revert back to earth. This behavior results in investor returns lagging fund returns. It’s a clear real-world indictment of our collective timing ability (or lack thereof). The shift toward index funds and passive investing in recent decades is partly due to this phenomenon – investors have recognized that active decisions (when to buy, when to sell) are often wrong on average, even among the pros.
The takeaway is that active investing isn’t just about stock selection; it’s about timing – and humans are generally bad at timing. We’ve seen that even star investors can fall prey to holding too long or selling too late. For individual investors, the deck is arguably even more stacked – emotions can run higher when it’s your own hard-earned wealth on the line, and you might not have risk management frameworks that professionals do. Next, we’ll tie this discussion back to the concept of risk and why selling is such a point of failure for active strategies, particularly in the context of idiosyncratic vs. systematic risks.
Idiosyncratic vs. Systematic Risk – And Why It Matters for Selling
Let’s step back for a moment from specific stories and explain two important concepts: idiosyncratic risk and systematic risk. Don’t be intimidated by the jargon – these are straightforward ideas and understanding them will illuminate why selling is a much bigger issue for some kinds of investments versus others.
Systematic Risk (aka market risk): These are the risks that affect the entire market or a broad segment of the market. In other words, it’s the risk of being invested in anything. Examples of systematic risk include recessions, interest rate changes, wars, pandemics, etc. If the Fed raises interest rates significantly, most stocks might fall in unison – that’s a systematic effect. If a recession hits, nearly all companies’ earnings suffer to some degree. Systematic risks cannot be eliminated by diversification, because they pervade the whole market. Even if you hold 500 stocks, a severe economic downturn will likely drag all of them down together. However, systematic risk can be managed through asset allocation (for instance, balancing stocks with bonds or cash, which might not drop as much in a crash). Crucially, systematic risk is the kind of risk that long-term investors get compensated for – it’s the reason stocks have higher expected returns than, say, Treasury bills. You can’t avoid it entirely if you want to participate in the market’s growth.
Idiosyncratic Risk (aka unsystematic or specific risk): These are risks that are unique to a particular company or industry. Think of things like a company’s CEO resigning unexpectedly, a competitor releasing a superior product, a tech firm’s software being hacked, or a pharmaceutical company’s drug trial failing. These events can cause a single stock (or a small group of stocks) to tank, even if the overall market is fine. The key point about idiosyncratic risk is that it can be mitigated or eliminated through diversification. If you own just one airline stock, you’re exposed to all the quirks of that one company (maybe they have a plane safety issue, or a labor strike). But if you own an index fund of the entire market, any one company’s idiosyncratic problems are just a blip in the ocean – the impact on your overall portfolio is negligible. By holding many stocks across different sectors, you average out the idiosyncratic ups and downs. This is why financial advisors constantly preach diversification: it reduces risk without necessarily reducing expected return, because you’re shedding the risk that isn’t part of the broad market’s upward trajectory.
Now, what does this have to do with knowing when to sell? Quite a lot, it turns out. When you engage in active stock picking, you are deliberately taking on idiosyncratic risk. You’re saying, in effect, “I will accept the risk of Company X doing much better or worse than the market, because I think I can pick a winner.” If your pick is brilliant, you might beat the market. But if something goes wrong (either with the company or with your timing), you could significantly underperform or lose money even if the overall market is doing okay – exactly what happened with ARK Invest, for example, which lost money in a generally up market.
And here’s the key: if you’re betting on idiosyncratic risk (individual stocks), you absolutely have to make good sell decisions to manage that risk. Since any single stock’s fate can diverge wildly from the market, you must be vigilant about when to cut your losses or take profits. If you don’t sell, idiosyncratic risk can really hurt you. A company can go from market darling to bankruptcy (think Enron or Lehman Brothers) – a total loss for anyone who held all the way down. Or it can stagnate for decades as we saw with Cisco – tying up your capital with poor returns.
In contrast, if you focus only on systematic risk – for instance, by owning the entire market (say, via an S&P 500 or Total Market index fund) – you don’t have to worry about any one company blowing up. The only reason you’d “sell” a broad index investment might be to rebalance or if your life goals/needs change, not because of any single stock’s fortunes. Essentially, with a diversified portfolio, you can afford to “never sell,” because your risk is spread out and the market’s long-term trend has historically been up. Systematic risk (like a recession) will still cause declines in your portfolio, but you know that if you hold through the downturn, the diversified market is likely to recover over time without you needing to pick and choose specific exit points for specific stocks. This is precisely why Part 2 of this series will focus on how taking on systematic risk in a diversified way can spare you the pain of these selling dilemmas. By minimizing idiosyncratic bets, you minimize the need to be a market-timing wizard.
To put it another way: When you concentrate your bets, the timing of your sell (or lack of selling) can make or break your outcome. When you diversify your bets widely, timing matters much less. You can be a long-term holder through cycles without fear of a single position imploding your wealth. This doesn’t mean diversified investors should never sell anything or never rebalance – but it does mean they are far less likely to face the gut-wrenching “do I sell now or watch more gains disappear?” scenarios that undiversified investors grapple with.
Let’s circle back to one of our cautionary examples: Cathie Wood’s ARKK was full of idiosyncratic risk – concentrated positions in a handful of speculative stocks. When those bets turned, no amount of broader market strength could save her portfolio; only selling those names could have. By not selling, ARKK suffered the full brunt of those idiosyncratic declines. Similarly, an investor holding Cisco or any single dot-com stock in 2000 faced idiosyncratic risk – some companies never recovered. An investor in a broad tech index or S&P 500 would have seen a big drop too (systematic risk from the bubble bursting), but that diversified investor eventually recovered as the market moved on – because while some companies collapsed, other winners took their place. Diversification meant not having to perfectly choose which specific tech stock to bail out of, and when.
Conclusion: “Buy Low, Sell High” – Easier Said Than Done
The problem with active investing and stock picking is not so much finding what to buy – it’s knowing when to sell. The stories of Cathie Wood’s ARKK and the dot-com bubble’s wipeout of high-fliers like Cisco illustrate how even tremendous gains can turn into losses or lost decades if you don’t eventually sell or lighten up. Investors and their advisors should take these cautionary tales to heart. It’s all too easy to be lulled by a bull market’s success, only to be left holding the bag when fortunes change. If you’re going to pursue active stock picking, you must have a clear strategy for exits: whether it’s setting target prices, using stop-loss orders, or disciplined rebalancing to trim winners, some method is needed to counteract our human biases and lock in gains (or limit losses). As we’ve seen, many investors – both retail and professional – lack this discipline, and the results can be wealth-destroying.
However, investors are not without hope. If timing sells sounds daunting (and make no mistake, it is), you might ask: Is there a way to invest that doesn’t require me to be an oracle of market timing? The answer lies in shifting one’s focus from idiosyncratic to systematic risk – essentially, embracing diversification and the long-term growth of the broad market. By doing so, you reduce the need to make perfect sell decisions on individual holdings, because no single position can torpedo your portfolio. In Part 2 of this series, we will explore this approach in depth: how taking on systematic risk in a diversified way (via index funds, asset allocation, etc.) can provide solid returns without the headache of constantly deciding what and when to sell. We’ll discuss why, if you only take systematic market risk and diversify away the rest, you can let time and compound growth do most of the work, rather than feverishly trying to trade in and out of stocks.
In the meantime, the key takeaway from Part 1 is one of humility and caution. Active stock picking can be exciting and sometimes very profitable in the short run, but the sell decision is where many meet their downfall. As Joel Greenblatt said, “selling… that’s a tough one”– tougher than most realize until they face it. If you decide to play that game, do so with eyes open and respect for the challenge. And remember that there’s no shame in a more patient, systematic approach if you find that constantly figuring out when to sell individual stocks isn’t for you. After all, the goal is not to win bragging rights for a great stock pick that you round-tripped – it’s to grow and preserve your wealth. Sometimes, that means acknowledging that the best way to “sell high” is to have a strategy that doesn’t depend on perfectly selling at all.
Stay tuned for Part 2, where we’ll shift from cautionary tales to potential solutions – focusing on how to capture market upside (systematic risk) while minimizing those company-specific pitfalls that force hair-pulling sell decisions.
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