Selling your shares can be a tricky decision. Often, investors may focus on the gains that they could hypothetically miss out on if they sell, rather than the calamity that they might avoid.
Fortunately, Chris Stott, Chief Investment Officer at Wilson Asset Management, and a director of its funds including WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX), has some useful advice.
According to him, here are 6 signs you should think about selling your shares (I have rearranged their order for ease of explanation):
- Directors are selling
- Founder sells out
- Share price is at a 12-month low
- Large investors exit
- The 'story' changes
- Incentive structures change
Overwhelmingly readers will note that his suggestions revolve around the selling of shares by insiders. The selling of directors and/or company founders may suggest that these insiders are losing their faith in the company, although as we wrote here, insider selling is an imperfect signal.
At least two of Mr Stott's suggestions concern short-term signals, with exits from large investors potentially leading to price weakness in the short term. His belief is that a share price at a 52-week low can indicate fundamental issues with a company and may lead to its shares falling further to new lows.
I have no opinion on that matter; for a fund manager, getting the right price on trades is very important. However, as household investors may not spend more than a couple of hours a week investing, my suggestion for readers would be to focus your time on the next two points, which may prove more rewarding.
The 'story' changes
Mr Stott's last two tips are the best; watch when the story changes and watch when what management gets paid to do changes. The story of QBE Insurance Group Ltd (ASX: QBE) in recent years has been something like 'we have put our problems behind us and can now focus on lifting the performance of the core business'. Recent downgrades have called into question whether this story is accurate, and may signal meaningful changes in the range of likely outcomes for the business over the next few years.
As to remuneration, for example, big banks like Commonwealth Bank of Australia (ASX: CBA) may have their executive remuneration linked to meeting gender diversity targets. Although this is a worthwhile goal (and one I support), one possibility, depending on the amount of remuneration at risk, is that executive attention becomes focused on lifting gender diversity at the expense of other business tasks.
Every so often, companies will change the criteria that executive performance is measured against – typically lowering the hurdles that would result in payment of bonuses. This can be a signal that future performance at the company is expected to be lower.
It's hard to make a perfect decision in investing. However by following the key tips above, hopefully your sell decisions will improve in the future.
