Blog: Do old investment adages still apply today?

Alasdair Ronald, senior investment manager, Brewin Dolphin separates the wheat from the chaff when it comes to investment advice.

Since starting my career back in the 1980s, I’ve come across a range of sayings, proverbs, and maxims which have done the rounds in investment circles. In some cases, they’ve even been accepted as fact.

A lot has changed since then, but do they still stand up today? There are investors who live and die by them, while others have become the investment equivalent of old wives’ tales.

Here, I outline what some of them mean and whether they have passed the test of time:

1. Buy on the first bid… – We’ve seen a lot of M&A this year, which, generally speaking, is good for share prices. To take Sky as an example, in December 2016 its stock was trading at 755p, just ahead of a cash offer of £10.75 per share from 21st Century Fox. Following a deal in which the Walt Disney Company would buy the film, television, and international businesses (including Sky) from Fox, there was a counter-bid from US cable giant Comcast. The bidding war has seen Sky’s share price rise to £14.52 – buying on the first bid would have netted a profit of nearly 50 per cent.

2. …Sell on the first profits warning – The first profits warning tends to be when the chief executive realises there’s a problem. The second is when they have a closer look and see it’s even worse than they thought. At this point the company often finds itself with a new leader, whom takes a look at the balance sheet and has to issue another one. Rolls Royce was a case in point three years ago. The company had announced three profits warnings before its (then) new Chief Executive, Warren East, was forced to issue a profits warning on his second day in the job. He then had to announce another just fifteen months later. From the first profits warning to the last, the share price fell by more than half.

3. The first cut is the cheapest – No one likes to admit it when they are wrong. But, when it comes to shares, facing the truth is the best policy. Leaving money tied up in underperforming funds or a share that’s down on its luck does you no favours – it’s better to re-invest into something which has brighter prospects. Shareholders in RBS have been hoping for a remarkable recovery since the financial crisis took its toll on the bank back in 2008. But that new dawn is still to arrive, with the shares continuing to underperform – they are down almost a third on three years ago, for example.

4. Leave something for the next person/a profit is never a profit until it is taken – A profit on paper doesn’t mean anything until you sell the share or fund in which you’re invested – few investors get anywhere by holding on to a stock for too long in a bid to eek every bit of value out of it. If it has had a solid run and you’re happy with your return, sell it, take the money, and run. If it goes up another three per cent, so be it. During the tech boom in the late 1990s, there were some fantastic profits to be had, with shares trading on ridiculously high ratings. At its peak in early 2000, the share price of the online accountancy package firm Sage (a constituent of the FTSE100 Index) was close to £10. However, within less than three years the shares were barely a tenth of that.

5. Never fall in love with a share – I was told early in my career not to fall in love with a stock. Put simply, it won’t love you back. In fact, it more often than not ends badly. Lots of people love Marks and Spencer. It’s a British institution, an anchor site for many high streets and shopping centres across the country, and generations of families have shopped there. But the shares are now half of the level they were at back in 2007. Prospects have changed for traditional companies like M&S; a fact reflected by its current valuation, which is now lower than relative newcomer ASOS.

6. Never try to catch a falling knife – When a share or a commodity starts to drop, it’s tempting to see a buying opportunity. But that doesn’t mean you should pile in. The oil price decline is a classic example: you’d have been forgiven for thinking it bottomed out in January 2015, when prices fell from over $110 barrel of oil equivalent (boe) to less than $50. But, by January 2016, the oil price had sunk to less than $30 boe. Many investors were stung on the way down, after trying to make up their losses by buying back in. Tesco is another example. Its share price peaked close to £5, but shortly afterwards the market started to get seriously concerned about competition from discounters (particularly Aldi and Lidl). One might have thought it the right time to buy at £4, £3, or even £2, but the shares fell below 140p.

7. If in doubt, do nowt – There are times when an investment opportunity may appear attractive, but there’s something leaving you unconvinced. And, if you’re not 100 per cent sure, then you shouldn’t do anything. A year ago, plenty of investors could have been attracted to the UK’s tobacco sector which is strongly defensive, offers good earnings and dividend growth, has a high level of overseas earnings and a range of leading brands. But some people, including me, had a nagging concern about the effect of rising interest rates on companies that are effectively bond-proxies. As it transpires, over the past year British American Tobacco has seen its share price fall 20 per cent and Imperial Brands 15 per cent, partly because higher-yielding shares have fallen out of favour as interest rates have increased and sterling’s value has recovered.

8. Be fearful when others are greedy and greedy only when others are fearful – In 2004 the Oracle of Omaha, Warren Buffet, wrote this quip in an annual letter to shareholders. The basic point he was trying to get across was that markets tend to overheat when investors get greedy and some share prices can be undervalued when people are skittish. The best recent illustration of this could be the days after the Brexit vote when many stocks, particularly financials, plunged – $2 trillion was knocked off world markets in its immediate aftermath. But, the FTSE 100 has recovered well and set a new record of 7,877 on May 22.

9. When your taxi driver gives you stock tips, it may be time to sell – It could be said that Bitcoin is the most recent example of this truism. The cryptocurrency’s rise in popularity coincided with astronomic growth in its value, to the point where almost everyone was talking about it. However, its ascension was swiftly followed by its fall: having nearly hit $20,000 per coin in December 2017, Bitcoin lost around 70 per cent of its value. Those who bought at the peak are nursing heavy losses.

10. No one rings a bell when the market peaks and no green light shines when it’s at its low point – It is almost impossible to say where exactly we are in a cycle – there are indicators, but the parameters continually change. The level of M&A we’ve seen since the turn of the year suggests a downturn isn’t far off – some analysts have even pointed to recession in 2020. But the level of intervention, largely in the form of quantitative easing, has distorted the economy as we know it and the same rules may no longer apply. The adage bears repeating, even if you’re a bull.

11. This time it’s different – John Templeton is widely credited with saying these are the four most dangerous, or expensive, words in investing. You could take it a step further and trace it back to a certain well-known political theorist who said that history tends to repeat itself first as tragedy, then as farce. Some commentators say the tech boom that has lifted stock markets of late has many similarities to the dot-com bubble of 2000. But others believe otherwise…

12. Sell in May and go away – don’t come back till St Leger Day – The summer months are the most leisurely time of the year – even for markets. The prevailing logic is that trips to Ascot, Wimbledon, and other sporting events means that trading tends to take a back seat and markets remain flat or start to drift. But a myriad of studies have suggested that this theory doesn’t hold up in reality. If you’re going to ignore any of these sayings, this might be the one.