Ask Colin

What is the best policy on profit-taking?

The detailed question was:

Question about managing trades...and when to adjust or take profits.

In your book on page 224 you suggest as a guideline that "each time a stock grows to 12% consider reducing it to 6% of capital" By this I guess you mean the capital holding of the stock? In your Portfolio you have some stocks that have gained by 141% (Ramsay Health Care).

I have a holding portfolio in LLC Lend Lease  with a Buy Entry at $11.66 and currently the stock is trading at $13.70 which is in effect 17.50% profit in capital so far ...

As this is a guideline and the market is currently in Phase 2 of a bull market can you elaborate on any other guidelines that could be considered ? Do you have any other suggestions listed on your website? If not then I will, based on the Phase analysis, wait for a dip to increase my holding and look to "let my profits run"..

There are already two answers in this issue in Ask Colin, one a very lengthy one...

My maximum investment in a stock is 6% of capital. My profit-taking guideline is that if its price rises and it becomes 12% of capital, I sell half of it, reducing my holding back to 6% of capital. If it was all bought at the same price and no other stock changed in price and I made no changes in the amount of  capital, this would be when the price doubled, but there are so many moving parts that it is not that simple. The reasoning here is two-fold:

1. It restores my basic diversification.

2. It deals with the psychology of a large position swinging the total portfolio value around significantly.

The most basic rule is to let your profits run and cut losses quickly. Taking profits cuts against this somewhat, but as always there is a balance of objectives. The greater sin is to sell all of a large position because you are uncomfortable holding so much at stake and then it goes up and up without you. My profit taking guideline tries to deal with this - in effect I take my profits over time, but always let my capital run until a stop takes me out.

Ramsay Health Care is a stock I sold half my holding - see the stock investment journal for discussion of that decision. There have been others in recent years.

Exactly how you manage large positions will depend on your investment plan, in which there are even more moving parts. It should be a part of your written plan. Only you can think through what works for you, using the reasoning in my investment plan as input to the extent that it makes sense for your plan.