Holding profits will be tough when you make profits too fast or if you don’t make them as fast as the high flying stocks. Have you ever wondered why?
Being too much involved in the market can make it tough to keep holding the positions especially the profits ones. It has happened to me quite often in the past and I repeated the same in few of my investments in my open portfolio.
Have you ever wondered why it is tough to keep holding the profits but it is a lot easier holding on to the losses? Let me share my views on it.
1. We Start as a Trader
The journey of a retail investor in market starts as a trader because this is how we are sold the demat and trading account. Soon we realize it is tough to consistently make profits as a part-timer in the market.
Once we aren’t consistently making profits, we start digging things on the Internet and do the research. We stumble upon some rules of trading and the first rule as a trader is to book profits regularly but investors let the profits ride, multiply and compound over time.
Traders cash in the profits at the resistance levels and often have targets based on ROI but investors have an approach of don’t care about resistance levels because they know it may take some time for the resistance to cross. If it can’t cross because of one-quarter results, it may do so in the coming quarters or may be in the coming years. As long as management is great and a company is doing things as expected, it is a matter of time when the stock price breaks out of the resistance.
This makes the approach of a trader and investors after taking up the position is totally different but as a trader, it really tough from being an active trader to a passive investor.
2. The Liquid Factor
If an investor wishes to liquidate his or her investment in the market, it shouldn’t take a lot of time or effort to do so. Other forms of investment like real estate which may need a buyer to liquidate or physical gold may need physical effort to liquidate.
Stocks or mutual funds are easy to liquidate and the first choice of fund for any investor is the stock market investment because of its liquid nature. Out of these investments, the first choice of stocks and mutual funds are those that are profitable. Ideally, it should be the other way round but booking losses is tough.
The easy and liquid nature of the market which is the biggest advantage for the investor makes it tough for investors to hold on to the profits as well.
3. The Inevitable Comparision
The high flying stocks hitting circuit after circuit and your investment not doing anything for an elongated period of time, makes it tough for you to keep patience and even doubt your own approach to investing in the market.
Are you playing it too safe in the market? Do you want to allocate some part of your portfolio in those high beta high volatile stocks to make even better returns? Is focus investing approach correct or should diversify?
Many such questions clutter the mind and lead to profit booking. Holding the losses is easier because if you don’t want to be booking a loss, there is nothing that can be done right at the moment when you have such questions in your mind but for profit, you may want to look for other investment opportunities which may provide much better returns and this makes it tough for an investors to stay put.
4. Profits Too Soon
Big profit way too soon for an investor can also mean one wants to book it. Investors need to stay put and ignore such price movements but it is really tough doing it. It is very easy to write what one should be doing on a blog but it is really tough to actually do it.
A trader isn’t concerned about why the price moves and is focused on how the price moves. An investor should know why there is a price movement. If one isn’t sure of the reason behind the price action (a news breakout and temporary in nature or due to good earnings and is more permanent in nature), it becomes tough to remain put.
Conclusion
Holding profits will be tough even when you make profits too fast and if you don’t make them as fast as the high flying stocks. The only way to make the most of your investment is to be able to have the margin of safety and invest in the right strategy and approach.
Do you find it tough to hold on to your profits? If yes what’s the reason behind it? Share your views and ideas in comments below.
I remember a story from a chinese movie… a man won 3 million in a casino and than lost it all. His friend asked why did you not leave it when you won 3 million or maybe even 2 million and then he said “You can’t win such kind of money with that kind of attitude”
Attitude is fine but then trying to be smarter than the market isn’t.
Another reason is that Profit vanishes and sometimes drifts back to loss if not booked. Eg. I bought HDIL at 60 levels and it shot up to 90 levels and then i did not book it and then it fall back down to 52… so where i could have earned 30 Rs. and reentered at 60 with maybe 1.5 times quantity this time, i am now making loss….
So true. One needs to be booking profits for sure but the story would have been different if the stock moved from 90 to 120. Regrets aren’t good on either side and one should learn out of it.
“Investor need to stay put and ignore such price movement “
What you mean? I red some other place also same but unable to understand ?
It means, investors need not worry too much about the day to day price movement in stock and can do nothing about it and focus on reading the quarter to quarter results.
Thank you.. I was thinking about “put and call option”
Ohh I get it now. Stay put has different meaning. Refer https://www.google.co.in/search?q=stay+put
Great article Sir.
Glad you like it Vicky.