Why does Buffett focus more on good companies, while Howard Marks emphasizes a 'good price'?

Source: Qile Club

I. Howard Marks’s Position-Holding Principles

Howard Marks has authored two classic books, The Most Important Thing and Mastering the Market Cycle. Investors who have read them will recall that, beyond the shared value-investing emphasis on long-term investment based on a company’s intrinsic value rather than its stock price, Marks places particular emphasis on the following three points:

1. Emphasis on risk and margin of safety: Compared with Buffett’s focus on identifying ‘long runways with thick snow’—i.e., high-quality companies—Marks prioritizes selecting high-quality companies that offer a ‘low-risk, high-return’ profile with a sufficient margin of safety. In other words, a good price is more important than a good company.

2. A cyclical perspective: Everything moves in cycles. Avoid industries at the peak of their cycle and instead favor those near the bottom of their cycle.

3. Investor limitations: Every investor faces cognitive constraints, and investment outcomes are heavily influenced by luck and investment style.

I suspect the second point explains why he avoided tech stocks this year, and the first point explains why he bought oil stocks.

But often, principles are ambiguous. Take the question of when to sell, for example. If oil stocks were gradually bought starting in 2021, what did he sell before that? Will he maintain his positions in these oil stocks next year? Handling such specific issues is far more difficult than adhering to abstract principles like 'being friends with time.'

Howard Marks writes memos each year to communicate with investors. His first memo of recent years, titled 'Selling Out,' addresses one of the most important questions in investing—'When should you sell a profitable asset?'—through a dialogue with his son, Andrew Marks.

In interpreting this article, I have rearranged the original sequence. Some points reflect widely accepted tenets of value investing—for instance, the importance of patiently holding shares in exceptional companies that compound value over the long term and not being swayed by short-term price movements or news events. These represent overarching principles, which I will briefly outline first in Section II.

However, the article also explores many concrete principles for selling in actual investing, touching on investment objectives, the nature of capital, and even deeper investment philosophies. I will address these in the latter part, focusing particularly on his book The Most Important Thing.

II. Two Common Mistakes in Reasons for Selling

The article includes a semi-fictional, semi-real conversation with his son, beginning as follows:

Howard: Son, I see that XYZ has risen by xx% this year and is trading at a P/E ratio of xx. Would you consider selling it to lock in some profit?

Andrew: Dad, I’ve told you before—I’m not a seller. Why would I sell?

Howard: You could sell some shares now because (a) it has already risen significantly; (b) you’d like to secure a portion of your gains to ensure they aren’t given back; (c) at this valuation, it might be overvalued and unstable. And of course, (d) no one ever went bankrupt taking profits.

Andrew: True, but on the other hand, (a) I’m a long-term investor—I don’t view stocks as pieces of paper to trade, but as partial ownership in businesses; (b) the company still has enormous potential; and (c) I can tolerate short-term downside volatility, which is part of the opportunity. Ultimately, the long term matters most.

Howard Marks believes that typical investors generally sell stocks for two reasons:

The first is because the stock has risen—investors enjoy gains, fear losses, and want to lock in profits to avoid feelings of regret.

The other is because the stock has fallen—leading investors to believe something is wrong with the company and fearing it will keep declining.

These two mindsets behind selling are interrelated: the latter is the cause of the former. Having experienced a shift from profit to loss, investors are driven by the fear of regret and thus readily sell positions with unrealized gains. Conversely, the former also causes the latter—by turning profitable positions into losses, investors are left holding only losing positions, which increases psychological pressure and makes them more likely to sell holdings with unrealized losses.

As a result, most investors fall into the trap of frequent short-term trading, selling low and buying high.

Most value investors agree with this view, which raises the question: if it’s wrong to sell when prices rise and also wrong to sell when they fall, then when is the right time to sell?

Howard Marks believes:

The rationale for selling should be based on investment prospects and must be determined through rigorous financial analysis and discipline, not on the investor’s emotions.

When you identify an investment with long-term compounding potential, the hardest part is exercising patience—staying invested as long as it remains safe based on expected returns and risk. Investors are easily swayed by news, emotions, the fact that they’ve already made substantial profits, or the allure of a seemingly more promising new idea.

For most investors, understanding this much is sufficient: remember, 'Don’t sell just because the price has risen, and don’t sell just because it has fallen.' Adhering to this principle alone can prevent the majority of trading mistakes.

However, real-world investing isn’t that simple—it cannot be reduced to one or two rules. For instance, Oaktree Capital specializes precisely in distressed asset investing and frequently invests in troubled companies. Moreover, Howard Marks holds one of the most open-minded views toward Bitcoin among prominent investment masters.

So how exactly does Howard Marks make sell decisions?

III. There’s Always a Compelling Reason to Sell

Let’s now examine the latter part of the conversation—where we begin to approach the real dilemmas in investing.

Howard: But if it’s overvalued in the short term, shouldn’t you reduce your position and lock in some gains? By doing so, if it continues to fall, (a) you’ve already limited your losses, and (b) you can buy back in at a lower price.

Andrew: If I hold shares in a private company with tremendous potential, strong momentum, and first-rate management, I would never sell part of my stake just because someone offered me a fair price. Exceptional compounding businesses are extremely rare, so giving them up is usually a mistake. Moreover, I believe predicting a company’s long-term outcomes is far simpler than forecasting short-term price movements—and when you have unwavering conviction in an opportunity, second-guessing your decision is meaningless…

From this exchange, it’s clear that Andrew Marx, the son, is a steadfast long-term investor, while Howard Marx plays the role of the investor’s familiar ‘devil’s advocate’—if the stock price is too high, why not sell some now and buy it back later?

Real-world investing is certainly not theoretical—anything is possible. Let’s continue reading the dialogue.

Howard: Isn’t there any point at which you would sell?

Andrew: Theoretically, yes—but that depends largely on (a) whether the fundamentals unfold as I expect and (b) how this opportunity compares with others, taking into account how highly I rate this particular opportunity.

Beyond stock prices, portfolio managers must also consider portfolio safety. Let’s continue with the dialogue:

Howard: You’re managing a concentrated portfolio. When you initially invested, XYZ was a large position; given its appreciation, it now represents an even larger share. Smart investors concentrate their portfolios and stick to profiting from what they know, but they diversify holdings and sell into strength to manage potential risk. Doesn’t the increased concentration now threaten to make our portfolio unbalanced?

Andrew: Perhaps—but that depends on your objectives. Adjusting would mean selling something I’m very comfortable holding to buy something I feel less confident about or don’t understand as well (or cash). For me, owning a small number of assets I feel strongly about is far superior. I’ll only have a handful of high-conviction insights in my lifetime, so I must maximize the value I extract from them.

Howard largely agreed with his son's viewpoint, but in practice, he also harbored some vague concerns.

The theory of 'time as a friend' is perfectly sound, yet the problem lies in the fact that people are not perfect—they make judgment errors and often struggle to recognize these mistakes on their own. In 'The Psychology of Human Misjudgment,' Charlie Munger outlined 25 psychological tendencies that frequently mislead people. Among them, 'the tendency to avoid doubt,' 'the tendency to avoid inconsistency,' 'psychological denial to avoid pain,' 'excessive self-regard tendency,' 'overoptimism tendency,' and 'misweighting due to availability tendency' all hinder our ability to correct errors.

Therefore, in investment practice, if one adheres rigidly to long-termism, there will be virtually no opportunity to sell holdings. Long-termism can easily become an excuse to avoid making sell decisions. Your returns would then depend entirely on the judgment made at the moment of purchase, leaving no room for error correction. It becomes all too easy to use long-termism as a cover for poor investment performance.

In summary, different investors face different challenges. Most non-professional investors lack sufficient resources, professional guidance, and time. Combined with the aforementioned psychological biases, this often leads to excessive trading. For ordinary retail investors, adhering to long-termism and holding only a few companies they truly understand may be a relatively appropriate approach.

However, for professional investors—or those seeking to generate excess returns—it is essential to define a reasonable selling price within the framework of 'long-termism' and to set position limits for individual stocks in the portfolio.

Howard Marks believes that selling is not an isolated decision and outlines two scenarios in which selling may be appropriate:

1. If your investment thesis appears less valid than before or its likelihood of being correct has diminished, it may be appropriate to sell part or all of your position.

2. Similarly, if another investment opportunity emerges that appears more promising and offers a higher risk-adjusted expected return, it is reasonable to reduce or fully exit your current holding.

In simple terms, reasons for selling fall into two categories: fundamental reasons and valuation reasons.

IV. Selling to Avoid Mistakes

Most investors lack hands-on experience in running businesses and base their assessments of company value solely on theories from value investing—such as economic moats, competitive dynamics, industry potential, strategic positioning, and so on. Precisely because a large number of investors adhere to the same set of theories, they often end up buying the same stocks, driving share prices upward. However, once this perceived value is not substantiated by actual earnings growth, stock prices fall—as seen with the 'Nifty Fifty' in the late 1960s and the 'X Mao bubble' in 2021.

The probability of misjudging a company's intrinsic value is extremely high—perhaps as much as 50% for most investors. In such cases, investment performance hinges on the timing of the sale: cutting losses promptly before other investors recognize the error and before losses escalate further.

This is why 'if your investment thesis appears less effective than before or its likelihood of being validated has diminished, selling part or all of your position may be appropriate.'

This statement encompasses two possible scenarios:

Scenario One: The company has changed, rendering the original rationale for holding the stock invalid.

Scenario Two: Your assessment has not been validated by the company’s actual operational performance.

Since investing inherently involves forecasting a company’s future, these two scenarios are essentially one and the same: the investor has made a mistake.

The book *The Most Important Thing* devotes an entire chapter to analyzing 'avoiding mistakes,' yet its conclusion is notably weak: even the best investors make different mistakes at different times; what is correct today may become a mistake tomorrow, and even the act of trying to avoid errors itself could turn out to be an error.

Viewed from this perspective, 'selling' aligns with the position-sizing approach I previously discussed in my articles: when you incur consecutive losses and begin doubting your own judgment, you should proactively reduce your exposure by selling holdings in which you lack conviction.

Such selling may superficially resemble 'selling because the price has fallen,' but it is fundamentally different—it is based on your own performance and evolving confidence, not on the stock price itself. The goal is to mitigate the risk of compounding judgment errors.

Thus, in this article, Howard Marks continues to affirm the merits of long-term stock holding, though his stance is not as resolute as that of his son.

5. Should You Swap Stocks or Switch to Cash?

The second reason stems from considerations of opportunity cost—it is essentially a stock swap. In fact, this is the most common reason why most investors sell.

The 'opportunity cost' of buying a stock: with a given amount of capital at any point in time, if you invest in Company A, you forgo the chance to invest in Company B; thus, the future appreciation of Company B naturally becomes the 'cost' of your investment in Company A.

For example, after selling shares of Company A, its stock price declines—but you deeply regret the decision because you used the proceeds to buy shares of Company B, which fell even more sharply.

The article provides a more detailed description of the factors to consider when selling:

What alternative idea might generate a higher return?

What would you miss out on if you switched to a new investment?

What would you forgo if you continued holding your current asset without making any adjustments?

How likely is it that holding cash would yield a better outcome than retaining your previous asset?

Simply put, at any given time, you are making a choice—either comparing Company A that you hold against Company B that you do not hold, or comparing against cash (Treasury securities).

And whichever benchmark you choose similarly influences your decision to sell.

Howard Marks’ approach is to always compare Company A with Company B and never hold cash. In his article, he outlines one of Oaktree Capital’s six investment principles:

“We do not believe we possess the forecasting ability required to correctly time the market. Therefore, as long as attractively priced assets are available, we maintain a highly invested portfolio. Concerns about market conditions may lead us toward more defensive investments and more cautious actions, but we will not increase our cash holdings.”

In contrast, Buffett holds substantial amounts of cash (Treasury securities) for extended periods, especially during bull markets—a clear distinction from Howard Marks.

Underlying this difference is a value judgment: Howard Marks believes that most assets are worth more than cash most of the time, whereas Buffett is less optimistic and thus avoids making such a judgment.

Here’s how I view the reason behind this divergence:

Looking at a century of U.S. business history, most companies have disappeared over time; only a few were acquired at high valuations or grew into large enterprises. Thus, over the long term, most individual companies underperform Treasury securities. However, the stock market as a whole has consistently outperformed Treasuries over the long run—precisely because a small number of “superstar companies” have generated the vast majority of the market’s gains.

Therefore, as long as a company consistently outperforms Treasury securities over the long term, it is likely one of these “superstar companies.” Buffett chooses to identify and concentrate his holdings in these rare firms, so his benchmark is Treasury securities.

By contrast, most asset management firms, including Oaktree Capital, aim to outperform Treasury securities through diversified portfolios—continuously rotating into companies showing stronger near-term prospects and avoiding those entering decline. Hence, when they decide to sell, their benchmark is other companies.

The latter naturally requires a higher selling frequency.

So, why has Buffett chosen a path different from that of other investment masters?

6. Great Companies or Great Prices?

At first glance, the views of value investing masters may seem largely similar—for example, both Buffett and Howard Marks emphasize buying cheaply. However, upon closer examination of this article and *The Most Important Thing*, you will find that Howard Marks places greater emphasis on price than Buffett does.

Buying below intrinsic value is, in my view, the essence of investing—the most reliable way to make money. (*The Most Important Thing*)

What you buy is not as important as what you pay for it; the purchase price is the decisive factor in determining an investment’s success or failure. (Investment Memo, 2021)

In Buffett’s writings, more than half of the content typically focuses on 'how to identify exceptional businesses.' In contrast, Howard Marks devotes very little space in *The Most Important Thing* to company analysis; instead, most of the book discusses risk, the relationship between value and price, and the dynamics of market cycles and contrarian investing.

Of course, some argue that *The Most Important Thing* primarily addresses investment philosophy rather than company analysis. Even in *Mastering the Market Cycle*, which focuses on industry and economic developments, the author places greater emphasis on external factors than on the quality of individual companies.

The conclusion is self-evident: relatively speaking (note these two words), Buffett places more emphasis on great companies, while Howard Marks prioritizes 'great prices.'

This subtle difference leads to a cascade of implications:

According to Andrew Marks, if your investment returns stem primarily from 'good companies'—which are extremely rare and thus not easily sold—you must extend your holding period and consequently increase your tolerance for higher exit valuations.

However, if your investment returns depend more on 'good prices,' given the stock market’s significant volatility—which makes 'good prices' far more frequent—you must keep capital readily available to seize opportunities, frequently engage in contrarian investing, and consequently hold positions for shorter durations, requiring lower tolerance for high exit valuations.

The distinction between 'good companies' and 'good prices' arises largely from differing perspectives on market cycles.

'Good prices' are often bestowed by market cycles. Howard Marks is highly attuned to cycles, which operate independently of a company’s intentions. When you hold shares in a consistently strong business that is undergoing an extended downturn cycle, would you still maintain your long-term position?

Clearly, both Buffett and his son answered 'yes,' whereas Howard Marks is less certain.

Buffett also values the attractive entry prices offered at cyclical troughs, but his returns are generated across full market cycles. Many of his holdings are in non-cyclical consumer stocks, resulting in cross-cycle ownership driven by 'good companies' rather than 'good prices.'

Beyond differences in philosophy, several other factors contribute to this divergence—one of which is highlighted in the article:

The decision to sell is not always within the portfolio manager’s control, as clients can withdraw funds from accounts or mutual funds. In such cases, fund managers may choose 'what to sell' based on expectations of future returns, but they cannot choose 'not to sell.'

In contrast, Buffett’s capital comes from stable insurance float, enabling him to avoid forced sales.

VII. Your source of returns defines your stance.

In Chapter 19, 'The Meaning of Value Added,' of his book The Most Important Thing, Howard Marks outlines Oaktree Capital’s 'performance vision'—the approach to achieving excess returns:

Match the market’s performance when markets are doing well; outperform the market when markets are doing poorly.

A careful analysis of this 'vision' reveals that for value investors, outperforming the benchmark during bear markets is a basic requirement. Quality matters most in downturns, and it is precisely then that strong companies demonstrate their worth.

However, matching the index during bull markets—a goal easily achieved by novice investors who do not manage risk—is actually quite difficult for seasoned investment masters.

In bull markets, momentum dominates: most stocks trade above intrinsic value yet continue to rise, requiring you to hold your nose and stay invested.

At the same time, to guard against the risk of sudden market crashes and fulfill the objective of 'outperforming the market when it performs poorly,' you must continually rotate into assets likely to fare better in bear markets—just as Howard Marks has done in recent years by holding energy and utility stocks.

Therefore, if you believe that market volatility can generate substantial returns—potentially on par with those from company growth—and given that A-share market volatility is more pronounced than that of U.S. equities, Howard Marks’ selling approach may be better suited to the A-share market than Buffett’s.

Editor/Jayden