Volatility? The market suffers from schizophrenia, no less. Caught in the daily twists and turns of maddening euphoria and panicky despair, fund managers can hardly be blamed for getting whipsawed emotionally and financially. But as is to be expected, the sensible response to randomness combined with insanity is emotion-free and detached behaviour.

Here are some no-nonsense rules I use for profit booking:

• Sell half your stock when the price target is reached. Find out more before doing this. You might want to revise your price target.
• Sell another 10% every time the stock rises by 10%. If selling is easy, find out more why you are getting to sell. Revise price target if required.
• If price falls, find out why this has happened. It could be randomness. If not, revise price target and take appropriate action i.e. sell if price does not offer reasonable value.
• Find other things to buy and evaluate them dispassionately against what you already own. If you want to sell most of what you own, you did not think hard before buying it, right?

For those who have recently seen their investments grow beyond their wildest dreams, Donald Cassidy’s bestseller says it all: “It’s when you sell that counts!” At the end of the day, it’s cash in the bank that counts as wealth, not the marked-to-market profits in your shining portfolio. So when does one sell?

Put at its simplest, one sells when one sees no more value left on the table. If all that you know about a company suggests that the current market price is more than or equal to the “logical” or “rational” value embedded in its stock, then you should be selling it from your portfolio. Note, however, the uncertainties implied: what you know may not (and is usually not) all that there is to be known, as also the fact that your logic may not coincide with the market’s logic.

Trying to time your sales is futile. It is derived from our fixation with the concept of profit maximisation rather than risk minimisation. There’s no way you can sell right at the top (or buy right at the bottom). Particularly in the short term, there’s no way of ensuring that a stock will not fall once you buy. Or that it won’t rise, after you sell. It’s to manage this uncertainty that fund managers routinely engage in what is known as “time-averaged selling”.

And that’s why I suggest you sell only half your stock at the target price, especially in this bull market. Let’s say your favourite stock has hit its rational value (the price target you had in mind when you invested in it). You could sell all that you own, and then rue your rigorous approach as the price rises even more. Or you could sell a part, and ride the way up, part selling at each rise, thus averaging a higher selling price.

Yes, the price could fall, but then you would still have sold some shares at a higher price, thus virtually ensuring that your average selling price was higher than the current market price. Averaging out your selling reduces the risk that randomly fluctuating markets impose on your profits. Ditto for time-averaged buying as well. Unless you are dead sure, don’t buy your entire quota of your favourite stock in one day.

The second thing about profit booking is that no company in the world is immune to a downturn. My personal favourite, Maharashtra Seamless has just crashed by some 28% in the last month or so, notwithstanding the fact that everything seems to be going just right for it. Since I have booked profits on this stock for over six months, I am down to zero currently and will eagerly revisit this brilliant performer with a renewed sense of bargain hunting in the current downturn.

Then again, the market moves in line with different themes. If it was software services yesterday, it is infrastructure and capital expenditure today. If it was outsourcing till a year ago, the next decade or so surely belongs to foreign fund inflows (not withstanding the P-note snafu), domestic consumption and power reforms. And different themes offer different stocks to enter and exit.

Once you sense that the big picture or theme that characterises the stock market over a period is changing, you will need to re-allocate. And that might bring home yet another need to book profits (or losses) on your portfolio.

Finally, a word on the frequency of trading. If you trade every day, you are trading prices, not value. You will be buying (and selling) for far smaller gains than what is available in terms of gap between price and value. However, if you engage in trading only once you fix value (and the discount that the current market price offers), you will trade for deeper gains, and ensure better margin of safety.

Interestingly, the model portfolios that we created for MONEY TODAY required me to trade only on closing prices on alternate Wednesdays. I am not surprised that these are performing better than my personal portfolio!

Dipen Sheth, Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws