The investor’s dream is to time the sale of a company's stocks to maximise profit.
Many industry professionals claim it is impossible. As an alternative, they promote the use of collective investment vehicles based on saving a fixed monthly amount.
This produces what is known as pound cost averaging: some months your regular amount will buy you more if prices are low, some months less if prices are high.
But if it is impossible to time a purchase or a sale, surely active managers who charge fees for doing just that should be consigned to the dustbin of history? Instead, they win awards at industry gatherings.
Fortunately, for the engaged and careful investor, there are many metrics and behaviour patterns that set off alarms, suggesting that now might be a good time to sell. Or not buy.
Reasons to be fearful
The following list of identifiable yellow alerts is extensive, but should not be regarded as comprehensive given its tendency to grow.
- Build-up of short-term debt
- Disappearance of growth
- Lack of product innovation
- Transformative acquisition, especially in a non-core sector. On the day of the announcement of such an acquisition, the bidder's share price traditionally goes down while the seller's goes up. Unwise acquisitions are notorious for destroying value
- Pressing ahead with an otherwise positive acquisition but at the wrong time
- Expansion into the US, a graveyard for many corporate ambitions
- When a heavily loss-making company's share jumps 40% on initial public offering
- Emergence of lower-cost and more efficient competitors
- Drop in sales
- Fall in margins
- Costs continue to rise even as sales fall
- Market share falling
- Directors sell shares
- Others are buying like there’s no tomorrow (defined as the time of maximum optimism by John Templeton)
- A similar stock looks more attractive because of a lower current valuation
- The company builds a new HQ
- The company HQ moves to nearer the home of the CEO
- An accountant is made chief executive officer (Dalgety and RBS)
- IT systems fail (banks seem particularly vulnerable, having grown their IT piecemeal since the 1960s)
- The CEO kicks up a stink over pink wafer biscuits in the boardroom
- The CEO also acts as chairman
- Non-executive directors resign without an explanation
- Compliance officers resign
- The company buys its own jet
- The company commissions its own flag to be hung from flagpoles outside its offices
- The company spends a small fortune on a pathetic new logo, signage, headed paper and even a new name that nobody likes
- You lose trust in the senior management
- The CEO believes he is a one-man super-race, but clearly isn't
- The CEO hosts lavish birthday and other special occasion parties
- The CEO acts as his own public relations department
- The cult of personality of the CEO becomes a company's raison d'etre, rather than its supposed core business
- The CEO's children hog senior management positions
- HQ acquires a helipad
- The business is evolving into something you don't understand (never invest in a business you cannot understand: Warren Buffet, the Sage of Omaha)
- The corporate structure is impossible to understand
- Specialist press and dedicated analysts say the corporate structure is impossible to understand
- The CEO buys a yacht, or two, or even three
- The CEO's wife becomes the official listed owner and goes to live in a notorious tax haven
- The CEO has been seen brawling in the street with a rival
- The company appoints joint CEOs
- When you start to hear people say: “This time it's different...”
And finally, and most compellingly, if financial journalist Brian Bollen recommends the share as a ‘buy’, sell at once