This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By Bruce Jackson (TMFGoogly)
Baker Street, London -- With the announcement on Monday of a top-up for Misys (LSE: MSY), after that transaction is completed the Qualiport's cash coffers will be bare. That's not a situation I feel particularly comfortable about, despite the fact that I believe money you've put aside to invest in the stock market should actually be fully invested in the market -- if that makes sense!
My slight problem with being fully invested is that you need to sell in order to buy. That immediately reduces your flexibility. Let's say that Vodafone AirTouch (LSE: VOD) suddenly drops to below the Qualiwatch buy price of a split-adjusted 210p. In order to take advantage of what you hope will be an irrationally low (relatively) price, you have to decide which of the existing eight companies to sell. That's no easy decision, especially as some of them may currently be undervalued by the market, and some may be currently overvalued.
In the new Motley Fool UK Investment Workbook (out now and on sale at our new bookshop for just £5.99), I suggested the following five selling rules, which cover most scenarios.
1. Sell if you made a mistake by buying the shares in the first place.
You may have bought shares in a company that you hoped was going to be the 'Next Big Thing'. It was probably a bit of a speculative buy anyway, or heaven forbid, you bought it after your ex-mate tipped it to you. Or, you didn't realise that a company with sharply rising debtors and falling creditors was one that was potentially storing up future problems for itself. You have another look at the business this company is in, and decide you don't really understand it, so you sell the shares. If you do your homework properly in the first place (i.e. before you buy the shares), this rule should hopefully not be invoked too often.
2. Sell if the company's story has changed, for the worse.
Companies evolve. They hopefully keep on growing and growing over time. But sometimes things go wrong. Suddenly you're looking at quite a different company from the one you first invested in. It may have made an ill-advised acquisition, a diversification which took it far away from its core business. You may find that the industry your company operates in is fast deteriorating. The coal and steel industries may have been good ones to invest in many years ago, but these days they are capital intensive, low growth industries. Laura Ashley (LSE: ALY), that veritable British household name, is a classic example of a deteriorating company. This has been reflected in its share price, now languishing at about 18p, compared to a high of 211p in 1996.
3. Sell if you've got a better investment opportunity for your money.
Sometimes you will identify a compelling new opportunity, usually in the form of an equity investment. You should always be looking forward, focusing on the opportunities ahead rather than prior performance. Not having enough liquid funds to add new cash to your portfolio, or because you don't want to over-diversify, you need to sell an existing holding in order to buy the new one.
The difficult part of the equation is choosing which company to sell. One of the biggest mistakes investors make is waiting for one of their losers "just to get back to break-even." As we've said previously, forget the buying price. If the business is weak, and the shares are not ridiculously cheap, you should sell. Most great investors run their winners and cut their losers.
Having said that, you could also sell a share that you consider to be considerably overvalued, so much so that the potential future returns look low. However, be aware that some companies are perennially overvalued, as measured by traditional valuation techniques, and that you could find the shares still keep rising and rising long after you've sold them.
4. Sell if one or two companies dominate your portfolio.
(Fat chance of that happening with the Qualiport at the moment!)
Again, this one comes with a caveat. Some of the best investors have extremely focused portfolios, and will be happy to be in this situation and to let things carry on from there. These are individuals who are extremely confident investors, feel happy about the companies which dominate their portfolio, can control their emotions, and don't mind shocking volatility in their portfolio's short term performance.
Since there are very few super investors out there, we would suggest that you consider taking some profits if and when one or two companies dominate your portfolio. This could happen when one company represents say 33% of your portfolio. You will know when the time to sell has come, because you'll be feeling uncomfortable about the dominance this one share is having over your portfolio. The ideal scenario is that you'll be able to combine this rule with rule number 3, and have an excellent replacement candidate already lined up.
5. Sell if you need the money.
This option should only come up if you've done your planning in the first instance. If you were going to need the money in less than 3 years time, and ideally 5 or more years, it shouldn't have been in shares in the first instance. However, presuming you've been invested for that length of time, and you want to spend the money on a new house, yacht, or holiday, go ahead and do it. However, be aware that, courtesy of the power of compounding returns, you make the largest gains in the later years of your investments. Any interruption to that process can affect those returns.
When Not To Sell
1. Because you read in the newspaper that shares in general are over-valued.
As I've said before in Qualiport articles, ideally your buy decision should be made independently of your sell decision. If I was now forced to sell any of the existing holdings, it would be a tricky decision. Obviously, I'd first look at the progress of the underlying business, and then its future growth prospects. That would enable me to put some sort of long-term valuation on each company. At the moment, from a business and future growth perspective, Rentokil Initial (LSE: RTO) and Unilever (LSE: ULVR) are on double-secret probation. They just don't seem to have excellent and obvious future growth prospects.
Having said that, at the moment I can't see any more obvious buying opportunities, so being fully invested is far from the end of the world.
Other Foolishness
We've recently introduced charts to our data offering, adding more functionality than ever to the Fool site. Click on a quote for a company and you'll see an option to go to its chart. Being a long-term investor, rather than looking at a company's performance over a one year period, I prefer to stretch things out over a decade. As you can see, although Emap (LSE: EMA) have been toasted in recent times, over an extended time period they've comfortably outperformed the FTSE 100 index. Although past performance is no guarantee of future performance (sounding very Wise here), I'm obviously hoping that history is repeated with Emap, and in fact all the other Qualiport shares, which without exception have solidly outperformed the index over the past decade.
The Qualiport message board is flying high, with lots of great comment and debate. I encourage all Qualiport followers (all two of you) to read and post. Rob's back on Friday.
Company Change Bid DELL(US)+0.40 39.50 EMA +0.43 7.88 IIG 0.00 2.62 MSY -0.02 4.76 PIZ -0.01 8.05 RTO -0.04 2.01 ULVR +0.07 5.52 LLOY -0.09 7.68 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 29/09/99 356 Lloyds TSB 7.56 7.68 1.7% 04/11/98 245 Pizza Exp 7.93 8.05 1.6% 27/10/98 1133 Indep Ins 2.60 2.62 0.8% 27/01/99 74 Dell (US) 44.63 39.50 (11.5%) 22/04/99 348 Misys 5.76 4.76 (17.4%) 19/12/97 783 Rentokil 2.55 2.01 (21.2%) 17/04/98 301 Emap 10.20 7.88 (22.8%) 17/07/98 266 Unilever 7.53 5.52 (26.7%) Last Rec'd Total # Company In At Value Change 29/09/99 356 Lloyds TSB 2723.20 2734.08 10.88 04/11/98 245 Pizza Exp 1966.34 1972.25 5.92 27/10/98 1133 Indep Ins 2990.63 2968.46 (22.09) 27/01/99 74 Dell (US) 2007.42 1771.52 (235.90) 22/04/99 348 Misys 2028.71 1656.48 (372.23) 19/12/97 783 Rentokil 2046.53 1573.83 (472.70) 17/07/98 266 Unilever 2052.00 1468.32 (583.68) 17/04/98 301 Emap 3139.85 2371.88 (767.97) Cash: £1,032.56 Current Total : £17,549.38 Total Invested: £20,184.62 Profit/(Loss) : (£ 2,635.24) Value Per Share Day Month Year Qualiport 0.53% -3.89% -16.90% FTSE 100 -0.77% 0.26% 2.77% FTSE All Share -0.66% -0.28% 5.40%