An aide-mémoire to selling shares

Investors should watch their shares like a hawk. Things change and today's darling can become tomorrow's pariah.
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The Independent Online

Buy-and-hold seems to me to be silly advice for the investor. At best it is an incomplete philosophy, at worst it is downright dangerous.

Buy-and-hold seems to me to be silly advice for the investor. At best it is an incomplete philosophy, at worst it is downright dangerous.

The implication is you should choose a company you like, acquire shares and then hang on to them no matter what. In this way, say some pundits, you will evade the vagaries of the stockmarket because, whatever happens on a daily basis, the facts prove over a long period of time your shares will increase in value.

Rubbish. It may be true that for the past several decades the stockmarket as a whole has increased in value. I am also prepared to believe that if I had invested in the FTSE 100 in 1918 (was there a FTSE 100 then? - I don't think so) it would have turned into more than a million by now. But this information has little to do with our individual portfolios.

Unless we take the robotic route of investing in tracker funds, we are not buying into the market as a whole. What we are doing is acquiring a stake in businesses whose performances have little or nothing to do with whether or not the FTSE is up, down or static.

We buy shares in a company because we believe it is a good business with a bright future. We should also be confident the price does not reflect what we consider is the full value of the share. In other words, we think we are getting a bargain. Remember though, in the investment world nothing stays the same. Businesses are constantly changing and it is vital that we constantly monitor our investments. We must be fully aware of the implications of anything that happens.

So don't buy-and-hold. Buy-and-watch, like a hawk.

If our original choice is correct, and the success of the business moves its share price upwards, then a time will come when it is fully valued by the rest of the market. That is the time to sell, find another bargain and repeat the process again.

For what it is worth, let me pass on a little aide-mémoire I use to help me decide whether to sell a share. When I buy the stock I note in my little black book what I consider would be a reasonable profit. I try not to be greedy or over-optimistic because I am not establishing a definite sale price, just a reminder to check the fundamentals and market sentiment thoroughly again.

Notice I mention market sentiment. This is a factor which, whether we like it or not, is as important to a business as profits and dividends. If the market likes an idea, a sector or a company, the share price will escalate. But sentiment is ephemeral and today's darling can be tomorrow's pariah.

Nothing illustrates the point better than the descent of Amazon's share price this week. If you were in at the beginning you could have made a killing but investors got things out of perspective. Even the management began to believe they were more than a glorified bookshop and I watched in disbelief a few months ago as one of them said in a television interview that profit was "not one of our major considerations at the moment". If I had owned Amazon shares at that time I would have been an immediate seller.

***

These lines of the diary are being penned from what must be one of the most beautiful places on earth. My room at the Wickaninnish Inn, near Tofino on Vancouver Island, overlooks a bay of white sand and blue sea. In the last couple of days I have seen a black bear munching berries while her two cubs play and moose and elk enjoying the freedom of the Rockies. Canada is beautiful.

Tofino is a one-horse town on the Pacific Rim, so it's not surprising I can't get hold of British newspapers. Canadian journals are dominated by parochial news and the business pages are excited by local fund managers attempting to manipulate share prices by dubious means.

One item that catches my eye is in Canada 40 per cent of chief executive officers - those chaps who take huge salaries for being buck-stoppers in public companies - will be in their jobs for less than 18 months and most will leave involuntarily. The reason given is principally the increase in private investors who, apparently, are impatient for results and, unlike the institutions, will not put up with excuses. I have no sympathy with the CEOs, they are generously rewarded for steering their ship.

American politics receives extensive coverage and much space is devoted to the presidential election. The question of retirement pensions is at the forefront of the debate and both parties are turning to the stockmarket for their solutions. Despite their suicidal eating habits - training for obesity seems to be a national pastime - Americans, like us, are living longer and this is causing angst for those who have to cut the social security cake.

Republican candidate George W Bush promises to divert a proportion of personal income tax into individual investment accounts. Democrat Al Gore says he will give tax benefits for investment accounts established for retirement purposes. It is now generally accepted in America that share ownership is the most sensible way to take care of your long-term financial future.

***

Avid readers of this column will recall I recently discussed ways of looking after your portfolio when you are away. One friend had a what-will-be-will-be approach and forgot about it for a fortnight, the other rang his brokers on a daily basis.

In the event I was faced with Hobson's Choice during my two-week Canadian sojourn because the papers didn't have any UK prices, my mobile didn't work and whenever I got to a hotel phone it was the middle of the night at home.

I'm back now and have just updated my portfolios. I can tell you that while I was on holiday I became richer - by 0.03 per cent.

***

I''m having dotty problems. For the last couple of weeks my e-mail address at the end of this article has appeared without a dot between terry and bond. So if you have sent me a message recently please send it again to terry.bond@hemscott.net.

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