Derek Pain: Watch out for warning signs if you've become wedded to a stock

I regard myself as a long-term investor. The no pain, no gain portfolio's longest- serving constituent dates back seven years, although I personally have held some shares for more than 30 years.

But there are, of course, dangers in becoming wedded to a stock. I suspect many small shareholders actually fall in love with a company and too often ignore danger signals.

Brian Winterflood, a respected City veteran, once told me: "When the picture changes, then sell." It's sound advice. Too often, shareholders stick with a company come hell or high water. Indeed, I must plead guilty to occasionally putting my head in the sand, although some of my disasters have occurred after I have undertaken a speculative exercise fully appreciating the risk involved.

Shareholders should always keep on the ball. After all, stock market history is littered with companies – some once powerful blue chips and others minor players – that have gone bust, leaving those involved, employees and investors, ruing their fate.

Last week, I recorded that Essenden, a tenpin bowling chain which enjoyed re-recruitment into the portfolio in November 2012, was involved in takeover talks.

The portfolio acquired the shares at 24p; as I write they are 82.5p. So possible profits for all. But not, unfortunately, for some long-standing shareholders. Unless any acquisition price is, in effect, out of this world, they are due to suffer. For at one time the shares were very much higher. It could be argued they were the equivalent of between 300p and 400p. Any possible bid – say, 100p – would leave them sadly in the red.

Yet warning signs were evident. Essenden started life in the 1990s as Allied Leisure, then it became Georgica. Ten years ago, the group joined the portfolio.

Its reign was relatively brief. Then consisting of snooker clubs as well as tenpin alleys, the shares moved ahead and there was talk of a takeover, but then it was decided to split the company in two. Such a manoeuvre always causes consternation, because I invest £5,000 in a stock and, to retain my normal level, I would have to top up two shareholdings, which could be an unrewarding exercise. So I sold, netting a nice profit.

Perhaps I was fortunate. After going their separate ways, the snooker side suffered, and tenpin bowling, which soldiered on as a quoted vehicle, failed to prosper until Nick Basing became the chief executive in 2009.

Since then, Essenden has made remarkable progress, but not enough to make up, in share price terms, for any past misdemeanours.

The departure of Essenden would leave another vacancy in the portfolio. I am not, however, complaining about bid action. It has been exceedingly profitable for the portfolio, which ignores dividend payments and relies entirely on capital appreciation to remain in the black.

I believe around a score of constituents have fallen to takeovers and some others have been involved, like Georgica, in various forms of corporate action.

However, I do believe it is unwise to buy a share solely on takeover hopes. My experience suggests it is better to seek out well-run companies with, hopefully, splendid prospects. Many such businesses eventually succumb to takeovers and, if they don't, the investment should continue to prosper. Even so, a small cap gamble can, on occasions, prove irresistible and possibly lucrative.