Why investors are careful buyers but careless sellers

JACK SCHWAGER was once a moderately successful trader who wondered why he was not an immoderately successful trader. Perhaps if he knew the secrets of trading superstars, such as Paul Tudor Jones or Jim Rogers, he might improve. So he asked them for those secrets. “Market Wizards”, his book of interviews with hedge-fund traders, was published in 1989. A second volume soon followed.

Both books have since been pored over by a generation of hedge-fund wannabes. They are full of great stories and tips covering a range of investing styles. Yet there are common elements. It is striking, for instance, how little emphasis the wizards put on getting into a position—finding the right trade at the right entry price—compared with when to get out of it. That makes sense. Deciding what and when to sell surely matters at least as much as, and perhaps more than, deciding what to buy.

The wizardly injunction to cut your losses and let your winners ride has hardened into hedge-fund doctrine. Even so, it is not widely practised in mainstream investing. Fund managers pay lots of attention to buying decisions. But they are remarkably careless in deciding what to sell.

That is the central finding of “Selling Fast and Buying Slow”, published late last year by a trio of academics—Klakow Akepanidtaworn of the University of Chicago’s...



via The Economist: Finance and economics Business Feeds

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