Should you book profits at all?

or When should you book profits – in volatile asset classes like equities and Real estate is a billion (sorry make it a Trillion dollar question)

Partial booking of Profits is a MUST! – my broker’s favorite statement!

I seek to invest in dividend yield stocks, believe in Buffet’s theory that “a share should be bought forever” and at the same time a proponent of booking partial profits on a winning position. Especially if a small-cap stock is up significantly, locking in some gains is surely useful.

Why should you book profits?

Well, you invest to book gains, so get some capital back and put it in a different asset class or in an index. Coming in and out of the index is like moving money into and out of a savings bank account. Or you have invested in a commodity stock – and the commodity is hit a high. For example selling Tata Steel at Rs. 600 made sense simply because steel was doing reasonably well. When the commodity hits a low, the stock too will.

The other thing of course you now have some extra capital to invest in some new story that you have found. I have been through ups and downs – there are many people who do not appreciate a 3 year bear run. Cash is useful when there is a sale! Either you can buy more of the same share or pick something really cheap just because there is a distress sale by some fund house or a big investor. Fire sales are common when the index is down.

Having taken away a big part of the cost or sometimes the whole cost, the mind does not mind letting the share do the home run.

2 examples that come to mind are one lousy share called Deccan Gold (FV 1). This was lying in my portfolio at a cost of Rs. 12-13 per share. I sold this share from Rs. 50 to Rs. 135 (it peaked at 144 I think). Though at the price of Rs. 135 sold just 400 shares, it helped me create a buffer ‘cause I had sold a nice bunch at Rs. 107! Now the current price is Rs. 20. Clearly for me Deccan Gold was only a price story – not much of a clue on either the management or Gold prices.

About 2 years ago I sold some shares of EID Parry at Rs. 325. Logic? Sugar has peaked for sure? Similar is the story for fertilisers, aluminium, etc. even 2 wheelers and cars.

I sold Tata Power, LnT, Kotak Bank, Cholamandalam at the peak of the 2007 boom – because to me those PE ratios were not sustainable. I was right.

Recently I bought Hindustan Oil at 107 and sold partially at 90 but held on to a lot till it hit a low of 35 (on Tuesday, 10th Sep.) ….sitting on a loss. I had bought GMR at 71 and sold at 69 – with just the fingers burnt…if I had held on till it reached Rs. 12, I would have burnt my hand.

So, yes there are no rules…you create the rules as you go along in life. If you bought a share because somebody is on the board, sell when the guy quits the board. If you bought for a story, sell when the story is over or when the story cannot happen…

Well no clue but I need to take some money home too!!

It is very difficult to explain all this to clients. Most of them know only 2 things – buy all or sell all. Hold partially is a different emotion!