On Booking Profits

“Book your profits” is dispensed as prudence. It rests on a metaphor - profit as fruit picked from a standing tree - and the metaphor describes something that does not exist in the position it is being applied to.

What follows is an argument about what profit is, and what follows from that for the specific advice to withdraw gains at intervals while leaving the principal invested.

Why Firms Employ Accountants at All

Begin with a question Ludwig von Mises raised in Human Action. If profit were a physical thing - a coin one could weigh in the hand - no firm would need elaborate definitions of capital, revenue and expense, nor judgement about what to capitalise and what to write off. It would need only counters.

That firms pay for judgement rather than counting tells us what profit is: an abstraction, a difference between two magnitudes, constructed rather than found.

The abstraction is not thereby unimportant. It is the signal by which an entrepreneur learns whether resources are worth more assembled than dispersed. A firm indifferent to that signal does not escape it - it receives the verdict later and less pleasantly.

Profit Is a Residue, Not a Payment

An entrepreneur buys inputs at known cost and imagines a future in which output clears above them. That imagined gap is the whole enterprise, and initially it exists only in the mind. If the future cooperates, the gap materialises embedded in a selling price.

At no point does a separate sum change hands marked “profit.” It is the residue of a completed transaction rather than a line item paid across a counter. Nothing in the process ever isolates it as an object.

The Category Error in Booking Gains

Now apply that to the saver’s version. A holding rises from 100 to 150; the advice is to take the 50 off the table and let the 100 keep working.

There is no 50 sitting apart from the 150 waiting to be lifted clear. Realising value requires selling units - fund units or shares - and selling shrinks the position itself. An investor may trim exposure. They cannot prune along a seam between gains and principal, because the 150 and the 100 are not two objects but one object priced at two moments.

The error has a practical consequence rather than merely a semantic one. An investor who believes they have harvested a gain while keeping the tree will systematically underestimate how much exposure they have given up, because the mental accounting says the original position is intact when it is not.

This Is Not an Argument Against Selling

Reducing a position can be entirely sensible - for risk, for need, or because the price no longer compensates. Rebalancing is a discipline with its own justification, and none of it depends on the harvest metaphor.

The objection is to the framing, not the transaction. The framing flatters the investor into believing a smaller bet is the same bet with the winnings removed.

What This Means for Allocators

State the decision in units, not in gains. “Selling 30% of the position” is a description that survives scrutiny; “booking the profit” is one that conceals what changed.

Give the sale its own reason. Risk, liquidity need, or valuation are reasons. That the position has appreciated is not, on its own, a reason - it is the condition under which the metaphor becomes available.

Honesty costs the adviser little here. Not that profits are being booked, but that a smaller bet is being placed. The distinction is the difference between economics and horticulture.