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FOOL'S EYE VIEW
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It's May 1st, a time when morris dancers jig round the village green, anti-capitalists protest though London and investors sell their shares because the stock market is heading for a fall. There are many people who indulge in various May Day traditions. But whatever your thoughts on dancing with hankies or marching through Mayfair, there's nothing so daft as believing old stock market adages such as "sell in May and go away". Unfortunately, the world of investment is littered with such nonsense. Here's a rundown of a handful of silly stock market mottos. Sell in May and go away... ...and don't come back until St. Leger Day. This old proverb suggests shares generally fall between May and September, while mainly rise during the other parts of the year. No doubt stock market historians can 'prove' such a strategy works from past statistics. But the point is this: is such a data pattern purely coincidental? Logic would suggest so. A company's valuation (i.e. its share price) is based on its products, profits and prospects of today. So why should a company's past share price movement -- that is, past opinions on yesteryear's products, profits and potential -- have any real bearing on today's assessment of the company? It's a bit like a football commentator giving the past form of the two teams over, say, the past ten years. What the teams did way back when, with different players, different managers and so on, will never have any bearing on today's match. The (share price) trend is your friend
This old chestnut has become quite popular in recent years. That's because many would argue that as highly rated tech stocks began to register significant falls during April 2000, you could have easily escaped the subsequent carnage. What people forget, however, is that a few months earlier, numerous 'old economy' shares had been recording notable declines too. Had you thought the trend was being friendly then, and telling you to sell your banking, brewery and tobacco shares at that time, you'd have missed out on some substantial gains. Rather than take a chance on share price trends, paying attention to company fundamentals would have proven a far better bet. What would you have preferred? A loss-making flaky dotcom valued at 1000 times sales, or a long established market leader yielding 7%? In fact, business trends are your main friend in the stock market. Knowing that people like to shop at a certain supermarket, prefer a certain type of mobile phone or read a particular newspaper, is far more rewarding over the long-term than second-guessing other investors.
You'll never go broke taking a profit This is something you'll often hear from brokers. Eager to generate as much dealing commission as possible, people are encouraged to lock in a gain every so often simply because they have a gain to lock in. Admittedly, if you're lucky enough to pick winners every time, such a strategy won't see you go broke. However, it won't make you very rich either. Remember: decent investment opportunities are hardly everyday occurrences and frictional 'switching' costs will certainly harm your portfolio's performance. Thus it generally pays to stick with a handful of robust companies for the long-term, rather than constantly flit between numerous shares in the hope of compounding short-term gains. The time to take a profit, as such, is when either the underlying company significantly deteriorates, the company's valuation becomes grossly overpriced, or a better investment opportunity comes along. If the business is still ticking along nicely and the shares remain fairly valued, why sell? It's only 2p a share, what can I lose?
In other words, "it can't get much lower than this". Or maybe, "you can always tell when a share has hit bottom". With many beleaguered companies having their shares valued in pennies at the moment, it's tempting to think such low prices are bargains. But such reasoning misses one important point: the downside of every share is 100%. Indeed, many 'popular' penny share companies are on the verge of bankruptcy. If you invest £1,000 in a lousy share at 2p or a lousy share at 2,000p, the results are always the same. No matter where you buy in, the ultimate downside of picking the wrong stock will still be your £1,000 stake. _____________________________________ Fun, Food and Folly with Tom Gardner _____________________________________
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