Taking Profits

Celticheart Investor

A beginner's guide to trading and investing

Now this is going to sound obvious but until you actually realise your profits it is pretty much academic how well your investments are doing. You would think that this would have a significant effect on how people manage their profits but frequently it doesn't.

How many times have you heard this statement, spoken with regret:
"If only I had sold when it was at its height"?

Look at how many potential "Dot com" millionaires saw massive paper profits only to see them evaporate before their eyes. The problem comes down to one thing and one thing only, greed. The reluctance to sell a single share when the price is rising for fear of missing out on that "multi-bagger" (a common term for when an equity realises multiples of the original buy price).

We all have to work out our individual strategies but my advice would be to lock in some profits on the way up, that way if the price does retrace you can always buy back in at a lower price. The other benefit is that if your profits allow you to you can sell enough to cover your original investment leaving you with what is in effect a "free carry" for the balance.

This method of profit taking is often referred to as "top slicing", which simply means taking profits off the top of your holding, de-risking your investment as you go.

There is always the danger that the company will do so well you will look back with regret at the percentage you sold thinking you could have made even more money, but that is what investing is all about, taking profits when you can.

There is always going to be the risk of getting the timing wrong, sometimes we will sell prematurely and sometimes we will delay selling until the price has peaked and retraced. Only you can decide when is the right time to bank those profits, you just have to learn to live with those decisions. On balance they will protect your investment and you will probably sleep better.

There is also the danger of getting too emotionally involved with your holding feeling that by selling you are somehow showing loss of faith in that company.
That sounds strange I know but I have seen it happen and even felt myself being drawn into that situation as well.

Recently a CEO of a company I invest in was criticised becase he dare suggest that investors in his company would have been wise to bank some profits along the way. He was not suggesting that shareholders should sell out simply that they should reap the benefits of a volatile market. It was, in my opinion, one of the most honest things I have ever heard a CEO say but it was met with derision by the very people he was trying to advise.

Investing is a business and like all businesses it is ultimately about profit so take a long hard look at your holdings and ask yourself should you be banking some profits or simply holding on in the knowledge that, on paper at least, you are doing very well indeed.

Next time:  A glossary of terms

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.