Take a look at your portfolio and examine whether the stocks still meet your initial investment objectives. It’s worth the effort.
Those, particularly small retail investors, who take less than a passing interest in their portfolios may be pleasantly surprised on bitterly disappointed next time they look.
Others who monitor stock performance and do their homework are better equipped to make informed decisions about when to buy, hold and sell. The sharemarket is littered with examples of small investors watching their share prices fall in the hope they will recover.
The sharemarket isn’t about hope. It’s about work. Buying shares, putting them in a drawer and forgetting about them is fraught with danger.
Analyst James Samson, of Lincoln Indicators, recalls a client discussing a stock’s poor performance.
Investor: “I don’t know why I bought these shares. My broker suggested the stock 10 years ago and I’m still holding them. I would have been better off selling the stock years ago and investing elsewhere.”
Samson isn’t suggesting investors buy and sell stocks on price alone or short-term performance. Rather he urges investors to answer these questions.
Do you know why you bought the stock in the first place? Knowing why you bought the stock makes it much easier to determine when it’s time to get out.
Does an investment in this company represent the best opportunity for me to maximise my returns?
If I had to invest in the stock today for the first time, how much would I invest, if at all? Samson says if a stock isn’t meeting investment objectives, then sell.
He says investors are quick to sell on a hint of bad news – then ask questions later. Often, investors can over sell a stock, providing a buying opportunity. Investors hate uncertainty and downgrades – profit, production or otherwise.
Management should be carefully examined when buying stocks. Over the years, poor senior managers and executives have ruined good companies, while seasoned performers have turned failing companies around.
Investors expect forecasts to be met. Under promising and over delivering is preferred to the opposite. Company and management credibility is rapidly put at risk from unexpected announcements of disappointing news.
Samson says he examines the quality of the business and whether it has the potential to grow.
Last year, he recommended clients buy G8 Education (GEM) when the shares were trading at $1.16 on August 31. Samson says return on assets and earnings per share had grown in past periods and the outlook was bright.
“It appeared there were strong avenues for growth,” he says. “It was clear that an increase in dual income families was generating more demand for childcare. So strong fundamentals and a quality business with built-in demand put G8 on our buy list.”
The shares closed at $2.66 on July 17.
Samson says those who own the stock should continue to hold on a bright outlook for the long term. But, he says, GEM isn’t on his buy list at this point given the rapid price rise.
“I think there may be an opportunity to buy it cheaper than $2.66,” he says. “But the risk of waiting for a price decline is it may not happen.
“On the other hand, those who have enjoyed the ride up may want to take some profits.
“This is where initial investment objectives can help you decide. After all, stocks that go up more than 100 per cent in a year aren’t all that common.”
Volatility in financial markets continues to provide money-making opportunities for equity traders. The All Ordinaries Index reached a recent intra day high of 5229.8 on May 15 this year before falling to a recent intra day low of 4610.6 on June 25.
The Wesfarmers share price fell from an intra day $43.16 on May 15 to $37.95 on June 25. It was trading at $38.94 on July 16. Commonwealth Bank fell from $72.93 on May 15 to $65.70 on June 25. It was trading at $71.53 on July 16. Woolworths fell from $34.99 on May 15 to $31.75 on June 25. It was trading at $33.51 on July 16. CSL went from $64.70 on May 15 to $59.43 on June 25. It was trading at $65.15 on July 16. BHP Billiton fell from $34.46 on May 15 to $30.43 on June 25. BHP was trading at $33.37 on July 16. Woodside Petroleum was trading at $37.84 on May 15 before falling to $33.31 on June 25. Woodside was trading at $37.28 on July 16.
Samson says buying on dips can be an effective strategy if your investment case remains intact and the stock appears over sold. But initial dips can rapidly become bigger falls, as we all saw with Newcrest Mining.
Michael Heffernan, of Lonsec, says he is prompted to sell a stock when the price has fallen by 15 per cent or more from its recent high point. But the performance of the market is taken into account. So if the market has fallen 10 per cent, Heffernan says he will sell a stock if it’s down 25 per cent from recent highs.
“More often than not, I’ve found that my 15 per cent rule works in favour of investors,” he says. “I don’t want to be in a stock if the fundamentals are deteriorating, or where momentum and market sentiment is against it. Investors, who have held a company for years, can get too emotionally attached to a stock and take the ride down.
“I would rather get out. You can still make a handy profit even if a stock has fallen by 15 per cent. And you can always buy a stock back if the investment case changes. I like to buy on strength.”
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.