Taking Profit

[rub92me]

All the arguments I've heard so far drive diversification of the portfolio, which can be a good thing to reduce the risk, but I'm not convinced that it is the most profitable strategy unless you're really really good in picking the next trade. Let's take a simple example.

Total investment in stock A: Bought 50,000 at $1 . A = now $2 so my holding is now worth 100,000.

Scenario 1 : Let's assume stock A has a 70% chance of going up by 10% or more and a 30% chance of doing worse (say the average is zero gain) in the next 3 months. I decide to leave all my money in A. My expectancy is that my investment will be worth 100,000 + 7% of 100,000 = 107,000. (worst case)

Scenario 2: Let's assume I take 50% profit and let the rest run with the same expectation as under Scenario 1. So the remainder in A (50,000) will appreciate 7%, i.e my A portfolio will be 53,500.
I still have 50,000 to play with to make at least another 3,500.
Say I have a 60% success rate in picking a winning trade and my stop loss for the new 50,000 trade is 2,000.
40% chance of being stopped within 3 months - expectancy -800.
60% chance of winning. How much of a gain do I need to achieve to get a combined expectancy of more than 3,500? About 7,500. So I need to pick a winning stock that goes up by 15% or more to have an expectancy of increased profit. I.e. I need to find a stock that will perform twice as well as stock A. Can you really do that consistently?? If so, I'm impressed and you should take half your profits.
I can't so I let all my profits run, not half.

 

[Julia]

What do you sell if nearly everything is performing, yet you don't want to risk being there if a major correction happens??

Doesn't this depend to a large extent on the type of share and your investment approach, i.e. if, say, you have made a substantial profit on any of the big banks, Woolworths, etc., they are continuing to be in an overall uptrend, and you are a long term investor as distinct from a short term trader (in which case you probably wouldn't be in these stocks anyway), wouldn't you be Ok with just sitting out any correction that might occur?
I don't see the point - if you have bought into a company which you regard as a solid long term investment - in selling just because a correction looks possible. Complicates your tax situation, and costs extra brokerage.

Different story, though if you've achieved a large profit on something more speculative. Then I'd be taking steps to protect the profit.
I'm sad to say that, before I learned this lesson, more than once I've let profits drift away as the SP dropped.

I see a lot of people on this forum trying hard to reassure one another that some stock or other "just has to recover", quoting various aspects of the fundamentals. Meantime the SP falls forever downwards. GTP is a good example of this.

 

[Brujo]

Yes Julia the type and intent of investing you're doing will of course affect your decisions. If you buy BHP, you're normally buying almost for your superannuation, (to generalise!) so a 3 month or 20% correction is not a factor.

Unfortunately my own holding is such that I almost consider Mundo and Bannerman as blue-chip!!?!, so I am pretty exposed to shorter term market corrections!!