Introduction:

In the realm of investing, there exists a fundamental principle that is often touted as one of the keys to success: “Let your profits run.” This strategy emphasizes allowing winning investments to continue growing in value rather than prematurely selling them for a small gain. In this article, we will delve into the overview, history, and example applications of this powerful approach to investing.

Overview:

The concept of letting profits run is rooted in the idea of maximizing returns by allowing successful investments to fully realize their potential. Instead of hastily selling at the first sign of profit, investors employing this strategy hold onto their winning positions, allowing them to continue growing in value over time. By doing so, investors aim to capture the full extent of a stock’s upward trajectory, thereby maximizing their gains.

History:

The principle of letting profits run has been advocated by many successful investors throughout history. One notable proponent of this strategy was Jesse Livermore, a legendary trader who made a fortune in the early 20th century. Livermore famously remarked, “It never was my thinking that made the big money for me. It always was my sitting.” His words encapsulate the essence of letting profits run – the importance of patience and discipline in allowing winning trades to unfold.

Another figure who espoused this approach was Richard Dennis, a commodities trader known for his Turtle Traders experiment in the 1980s. Dennis believed in riding winners and cutting losers short, a philosophy that underpins the strategy of letting profits run. His successful track record serves as a testament to the effectiveness of this approach in the world of trading and investing.

Example:

To illustrate the concept of letting profits run, let’s consider an example involving a hypothetical stock investment:

Suppose an investor purchases shares of Company X at $50 per share. After conducting thorough research, the investor believes that Company X has strong growth prospects due to its innovative products and expanding market share. As anticipated, the stock price of Company X begins to rise steadily over the following months, reaching $70 per share.

At this point, the investor faces a crucial decision: whether to sell the shares and lock in a $20 profit per share or to let the profits run. If the investor adheres to the principle of letting profits run, they would choose to hold onto their position, believing that Company X still has room to grow and generate further gains.

Over the next year, Company X continues to deliver strong financial results, driving its stock price even higher. Eventually, the shares reach $100 per share, resulting in a $50 profit per share for the investor. By exercising patience and allowing their profits to run, the investor has more than doubled their initial investment, reaping significant rewards in the process.

In contrast, if the investor had succumbed to the temptation to sell prematurely at $70 per share, they would have missed out on the additional gains that Company X had to offer. This example underscores the importance of discipline and conviction in implementing the strategy of letting profits run.

Conclusion:

Letting profits run is a powerful strategy that can help investors maximize their returns in the stock market. By exercising patience, discipline, and conviction, investors can allow winning investments to continue growing in value, thereby unlocking their full potential. While it requires a willingness to withstand short-term fluctuations and uncertainties, the long-term rewards of letting profits run can be substantial. As evidenced by the success stories of renowned investors and traders, this strategy has stood the test of time and remains a cornerstone of effective investing practices.