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What types of news should prompt you to sell?
If the news is likely to affect the long-term prospects adversely then you could well be advised to sell your shares pretty darn quickly. You should consider whether the news changes your views on the reason you bought the shares in the first place. For example, if you bought the shares because they offered a decent yield and the company cuts the dividend, the primary reason for your investment has now changed and you need to review the position.
Do management changes matter?
It depends on the company. Does one person have a very important role and is irreplaceable, or can the company thrive following management changes? Management changes may signal the need for another analysis of the company and probably should not automatically trigger a sell unless the company is being driven forward by just one personality or it is so small that the only pool of talent is the individual who has left. Mind you, if this is the case maybe you should be considering why you invested in the first place; one-man-bands rarely make good investments. The one-person company often happens in the case of start-ups and with small companies that started out as entrepreneurial ventures. However, it would be rare for the management of a large multinational company to be totally reliant on just one person, without suitable understudies who can step in and continue or expand the businesses, or at least hold the fort until a replacement can be found from outside.
What about directors' sales?
Should you sell if the directors of the company are selling? Who could possibly know more about the prospects of a company than its directors? We would hope that they have, at their fingertips, information about current trading and forecasts for the future, so private investors often follow dealings by directors in the shares of their own companies avidly. But are sales by directors really a good guide to the future performance of the company?
What must be remembered is that directors may sell shares for many reasons, and not all are related to the potential performance of their companies. They might have wanted to buy a new house, or a boat. Who knows? A group of directors selling is a probably a bad sign, especially if they appear to be acting independently. But the significance of one director's actions should not be overemphasised. It is often thought that directors' purchases are a great guide to future performance, but Fools should be aware that usually this is not the case! Have a look at this excellent bit of research by Paul Marshall (TMFJonnyT), which shows just the opposite.
What about profit warnings?
Profit warnings are bad news for investors. If a company issues a clear profit warning the general rule is that you should sell; this is especially true if you are investing in high-growth, high-valuation companies. There is rarely anything to be gained by hanging on. The trouble is that most companies issuing profits warnings cannot bring themselves to tell you the truth, and so they cover up the warning with words that often do not sound all that bad. Often companies don't like to announce all the bad news at once; they hope that the problems will go away or they may not be aware themselves how bad things really are. One profit warning is frequently followed by another, or even several others. If a company you are invested in issues a profit warning, sit up and take notice, look hard at all the information you have, and consider selling.
What if earnings are less than expected?
When companies announce annual or interim results everyone will look very closely at the figures and will compare this with what is "generally expected"; the consensus brokers' forecast. If a company reports profits or losses that are worse than those generally expected you can be sure that the share price will be hit. Most of the fall in the share price will happen quickly, and unless you are really on the ball it can be difficult to sell your shares at a decent price. But as with profit warnings, poorer-than-expected results leave a bad taste in investors' mouths and it often takes a long time for a company to regain credibility. Poor performance in one set of results is often repeated in the next set, only even worse! But it is important to read beyond the headline figures, try to understand why the results were worse than expected. Have they been investing money that will pay off in a big way in the future? Have sales been delayed, but the delay means that the next set of results will be much better than was expected?
Other news?
Many other news stories can have an immediate effect on the share price, but you need to decide if they have any real implications for the long-term prospects of the company. For example, delays in bringing out new products, the loss of a customer, or a fire in a factory are all examples that may drag the share price down but will probably have little long-term effect on the growth of a large company.
Conclusion
The market is driven by news, and will almost always react much more violently to bad news than to good. The market will also almost always overreact to bad news, and it can take a long time for a company to regain credibility, and for the share price to recover. Always consider selling your shares if a company issues a profit warning, and remember that often one bit of bad news is often followed by another. But never, ever sell indiscriminately. Consider what the news actually means; is it really disastrous? Remember that overreaction by the market may well give opportunities to buy good companies at bargain prices.
Where Next?
Directors' Dealings -- the road to wealth?
When do you sell?