I talked about cutting losses, and you know that as a value investor, it does not make sense. Now, I’m going to talk to you about the other side, which is taking profits. Which makes me wonder what kind of drugs investors are taking. I don’t know, it just doesn’t make sense to me… Let me explain why.
Many of you may have heard the terms,
- “Gain is gain.”
- “You won’t go broke taking profits.”
Well, those statements are true. A gain is a gain. And you won’t go broke taking profits, and here’s the kicker, you also won’t get rich doing that. Most of these terms when you hear it, it makes sense, but as an investor, it doesn’t. Many membership clubs that you pay for monthly to have stock recommendations, have a take profit price level. Those things makes me cringe.
So let me explain my thoughts on the matter, and perhaps some investor who’s lost his way, may find himself again.
“I am a better investor because I’m a businessman. And I’m a better businessman because I’m an investor.”Warren Buffett
A stock, is a stake in a business, a part ownership. What most people in the stock market regard a stock is – a piece of paper. Its like a trading card for them that changes in price. Its like a game. And you can always hear them say “play”. “Dividend play”, “break out play”, “telco play” etc. A stock is a business. Whether you like it or not, you are a business man, buying businesses. And what does a businessman do? He monitors those businesses if they perform to his standards, and thinks of ways to best allocate capital.
When you buy a stock, you are a CEO of a holding company. Your portfolio is a holding company of businesses. And what does a CEO of a holding company do? He keeps the good ones and sells the bad ones.
Now here is the important part, would a CEO sell his most profitable business? Probably not. He would probably sell the bad ones, liquidate the money sinking ones, but he will never sell the prized jewel of his company. Now, when you sell a stock to make a profit, its like selling the most profitable business you have.
Now, let’s say for example, you are the manager of Chicago Bulls in the 90’s. A manager of a team is just like a businessman and just like an investor. Your team is like a portfolio of stocks. Those players are your stocks. Now, here’s what happen, Michael Jordan is your best player. Probably the best player in the history of the sport. If you’re selling to take profit, you are doing the same thing as saying you should sell/trade Michael Jordan for a profit because he has been very valuable to the team.
And that’s nuts!
Why would you sell the most profitable business or player you have? Why? Because you won’t go broke taking profits? Don’t you want MJ to give more and more championships? Don’t you want your business to continuously give you more money?
You see, there’s a lot of cancer that can affect an investor’s thinking. This is the kind of thinking that is speculative. Most investors have caught this kind of thinking which is unfortunate. You have to remember always that investing is a business.
And I’ll leave you with Graham’s wise advice:
“Investment is most intelligent when it is most businesslike”Ben Graham
So don’t take profits and don’t do drugs.
It reminds me of a friend who ask me why don’t I sold my MER since I’m at 37% gain.