Interesting Article About Taking Profits6 Jul 2024 15:45
FT Article - Not Taking Profits On Rise. (This is an old article but interesting)
The writer is an investment manager at Baillie Gifford
As valuations for some of the world’s largest tech companies are being questioned as expensive by some sceptics, I am reminded of a conversation from early 2020, when the terms “lockdown” and “social distancing” were largely unheard of.
My meeting with a chief investment officer was coming to an end. We were discussing Tesla. Its prospects were finally being recognised by the market and being rewarded with massive share price growth. He leaned across the table and said, “tell me you have been selling your shares”.
What struck me was not his belief that we should sell, rather that he appeared to hold it with such absolute certainty. His assertion had nothing to do with the company itself, but rather his ingrained belief that when a share price goes up a lot, you should sell. This was common sense. To do different would be foolish, greedy and undisciplined.
This conventional wisdom pervades much of the financial industry. As the old saying goes, “it’s never wrong to take a profit”. A client is unlikely to be unhappy or indeed notice if you sell a stock that subsequently goes up significantly. The loss of foregone upside is not captured in performance data. Perhaps it should be.
On the other hand, if an investment manager continues to hold the stock in question and its price starts to fall, the drop will be clearly visible in performance data. The manager should expect to be asked, if not chastised, about it. That is why, from the investment manager’s point of view, it is never wrong to take a profit.
What about the client? For the client, equity investing is asymmetric — the upside of not selling is nearly unlimited, while the downside is naturally capped. For the client it can be very wrong to take a profit. Sadly, too few fund managers try to get investment right for investors. Most conventions and practices exist to serve, protect and enrich investment managers’ interests.
In fact, it is often not just wrong to take a profit, but it can be the worst possible mistake.
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