Don't believe the old wives

The traditional advice to 'Sell in May and go away' is wrong. Equities perform badly in summer and better from November to April, but when exactly is it a good time to sell? Diary Of A Private Investor Terry Bond

Old wives have got a lot to answer for. Their tales often ignore accuracy for the sake of a catchy rhyme. Shepherds all around the country are nodding vigorously now as they remember the countless times they have looked up at the evening sky and noticed a tinge of red, herded their sheep out of the barn and into the field, only to find next morning they have a drenched and mud-splattered flock to contend with.

Old wives have got a lot to answer for. Their tales often ignore accuracy for the sake of a catchy rhyme. Shepherds all around the country are nodding vigorously now as they remember the countless times they have looked up at the evening sky and noticed a tinge of red, herded their sheep out of the barn and into the field, only to find next morning they have a drenched and mud-splattered flock to contend with.

And what about "Tread on a crack and you'll break your mother's back?" I recall as a six-year-old being quite surprised on arriving home from school to find my wayward feet had not confined my parent to a permanent wheelchair.

As far as investors are concerned, it is a pity the old wives could not find something to rhyme with March because "Sell in May and go away" was a couple of months too late. Although I must be fair and say there is more than a grain of truth in the advice that come spring we should cash in our portfolios and not venture back into the market until winter.

The fact is equities perform badly in summer. Going back over the last 20 years, the average total return from the FTSE All-Share Index between the beginning of May and the end of October has been just 3.3 per cent. For the other six months, November through to the end of April, the average return has been 15.7 per cent. Of course statistics can prove anything but when you are given this sort of information it is tempting to become a seasonal investor.

This sort of strategy is not for me. I don't like mysterious systems that have no apparent explanation and you can bet that, if I adopt the method next year, 2001 will be the exception that proves the rule.

So when exactly should you sell a share? There are as many answers to that apparently simple question as there are stars in the sky. They range from the sublime to the ridiculous, opinions among experts are strongly held and totally at odds with each other.

Warren Buffett, the old war-horse whose reputation as a seer is reviving as the dot.com dilettantes sink without trace, is adamant. "My favourite time frame for holding a stock is forever," he says.

If you are using a mechanical selection system which involves a particular stock market index Richard Koch, who wrote the excellent book Selecting Shares that Perform, has some rather radical advice. He suggests: "If the stock market index...declines by 10 per cent or more from its level when you started, or by 15 per cent from its previous peak, sell everything.

"Put the money in an instant high interest account. Then wait until the index has gone up by 10 per cent from its recent low and buy the same number of shares in all your previous companies, regardless of whether this level is higher or lower than that at which you sold - it should normally be lower, but do not fret or hesitate if it is not: just buy."

Having heard and read countless arguments, I have evolved my own method of deciding when to sell. Being a simple soul, it is a simple method and I pass it on for what it is worth. But first I should explain that my portfolios fall into two categories. I call them long-term and trading.

The long-term portfolios are my PEPs and ISAs, the haven for those shares that I believe will form the basis of my retirement. I have selected them carefully and, in my opinion, they are great companies that will withstand the test of time. Of course I check their financial results and the newsflow about them but it has to be a major change in fortunes before I am tempted to sell. Certainly the fluctuation of the market as a whole will not influence me.

The trading portfolio has a different set of rules. This is the section of my investing activities that has to provide the bread, butter and jam of everyday living so its content is of a rather more speculative nature.

Roughly 70 per cent of the shares in this portfolio are what I consider to be growth stocks with a reasonable five-year history of success, and which seem to be undervalued by the market. I watch these shares on a daily basis and will consider selling if:

* The core story changes. When I initially chose a share it was for a particular reason or set of reasons. Maybe it was the impressive sales figures, or the low price-earnings, perhaps it was a good management structure or a new product. Other warning signs are when the company fails to meet its forecasts or a competitor has an innovative idea. I watch the newsflow and check the figures, and at the slightest hint of a change I consider selling. I don't wait to see what other investors do, it's important to be at the front of the queue.

* The price changes dramatically, up or down. I need to know why. It may be something innocuous, like an institution selling for an unrelated reason, in which case the fundamentals will not be affected in the medium term. In may be a change in senior management which certainly could have future repercussions, or the company could be facing a lawsuit. Conversely, the price could rise on a piece of good news and if I consider it is over-hyped this may be a good time to sell.

* I need the money. The bond funds do not come from a bottomless pit and if I spot a new investment opportunity I will weigh its potential against the current holdings. If I believe the newcomer will perform better, an existing incumbent is ousted. Life's like that.

The remaining 30 per cent of my trading portfolio comprises what I would call hope stocks. These are investments in start-up situations where a company is involved in bio-technology or in the internet business. As with the growth stocks, my gimlet eye never leaves them and I apply the three criteria mentioned above. But in addition I have stop-loss and stop-profit policies.

* Stop-loss. These are volatile shares built on little more than hopes and promises. If the dreams are shattered a trailing stop-loss of, say, 20 per cent will limit the risk. A word of warning though, bad news from these one-product outfits can cause the share price to fall with the speed of light and you need to be both fast and lucky to sell in time.

* Stop-profit. When I buy a hope stock I decide a profit figure at which I will be more than satisfied. Typically it will be 40 per cent. When the time comes it is difficult to place the sell order because you feel the share is on a roll and still has some way to go. Don't be greedy, sell.

Finally, let me tell you a philosophy I most certainly do not subscribe to. When it comes to these hope stocks, I certainly would never consider a cost averaging policy. In other words if the price starts to plummet do not contemplate buying more of the same on the basis that on average your holding will have cost you less per share. As the old wives are fond of saying: "Never try to catch a falling knife".

***

I had a host of e-mails after last week's diary which listed the criteria for identifying growth stocks. I have been abroad this week but never fear, I will reply to everyone as soon as I can.

terry.bond@hemscott.net

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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