For a while now, I have been contemplating – would I have made more returns should I kept holding some of the investments instead of taking profit?
Because of limited capital, I see myself more of a trader now, buying in stocks and timing it (based on gut feelings), and then sell it in a short time to take profit.
Most value investors would probably be turned off by these behaviours, but to me, i’m merely maximizing my potential profit upside.
Assuming I have $10,000 to invest, assuming I invest in a stock that has the following price movement (starting price $1) in 6 months:
- Month 1: $1.10
- Month 2: $1.06
- Month 3: $1.12
- Month 4: $1.18
- Month 5: $1.15
- Month 6: $1.20
There are 2 ways you can do this: holding on until month 6 and you will earn 20%, or $2000. Not bad at all, and this is the long term value investment play.
But for traders, here’s what I would do:
Assuming I had 2 take profits positions, take profit at 1.10, and 1.18, here’s my end position at month 6:
- Portfolio End of Month 1: $11000 (TP at $1.1)
- With $11000, i enter at $1.06, buying a total shares of 10377
- TP at $1.18, portfolio end of month 4: $12244.86 (selling 10377 shares)
- With $12244.86, i enter again at $1.15, buying a total of 10647 shares
- At end of month 6, my portfolio value will be $12776.4
The end portfolio return is higher (27.76%) than holding on the investment long term (20%).
Of course, the TP and entry price has to be spot on, and you have to spend a lot of time monitoring the market. And then there’s the argument of the trading fees etc that will erode your returns, but if the price volatility is high, it is doable.
Another way to look at it is this, assuming you want to earn 20% in x time frame.
If you are lucky and manage to get a 10% return for stock A in a month, if you hold the stock, the time for it to reach another 10% might be longer, as compared to you taking profit, and then buy Stock B with 9.1% return, which will return you the same amount of the initial required 20% portfolio return.
For now, I’m using this method to maximize my gain on my US portfolio, and there seem to be enough counters for me to trade.
But of course, this is not recommended as there are no fundamentals to my trades, it’s just based on gut feelings, and I think I might regret this someday.
But before the day i really understand and analyses companies, I dont think I am an investor, I am just a trader or speculator.