Spring Cleaning The Investment Pantry

Fiona Clark, 1 October 2012

I love Spring. It’s a time of renewal, a time to sort through “stuff” and clear out what is worn out, broken or no longer needed.

This Spring I had a particularly good time in my pantry. I’m only half jesting, because even though the actual act of cleaning is laborious, time consuming and a little gross (we’ll get to that later), there is nothing quite like the feeling of opening up the pantry door to see lovely neat rows of perfectly positioned and labelled Tupperware containers (I am a big fan of the Tupperware party), sitting next to stacked tins, with the labels facing out, grouped according to content type and cuisine ethnicity. I may be a little weird that way…

Anyway, the pantry assault was quite confronting. I’m going to come straight out and admit that there was custard powder in my pantry with a best before date of 2002. I can’t remember the last time I used custard powder, so why was it there?

The pantry shenanigans got me thinking about how easy it was to decide when to toss something food related. Unlike the electric blue suit in my wardrobe (which may, one day, be fashionable again) there are some pretty obvious clues that something needs to go. Things like “use by” or “best before” dates are always pretty handy, but even without these there are the slightly strange smells, the even slightly stranger growths, the solidification or crystallisation and, my personal favourite, the inability to determine exactly what is in the container.

If only the cull was so easy for other things. Like, perhaps, an investment portfolio. Surely, I thought, there were easy “rules of thumb” to give an indication of when a stock investment had reached the equivalent of its “Best Before” date. So after some intensive research, consisting of hanging out in the tea room and randomly asking my investment colleagues as they tried to get their morning caffeine fix, I put together this easy to follow guide:

It has been a big disappointment. Okay, so the stock you thought you loved has fallen 40%, but surely it’s time for a rally. But…maybe it’s not. You could be missing out on better opportunities elsewhere. Don’t be afraid to cut your losses.

There’s a profit downgrade. After the shock has subsided, you feel a little disappointed, but at least it’s out in the open and we can all move forward with the restructure, cost-cutting, strategic overhaul or whatever the company announces they are doing to solve the problem. Unfortunately, sometimes a profit downgrade is a symptom of a bigger problem and a single profit downgrade doesn’t stay “single”. This doesn’t mean you should sell every company that lowers its forecasts – sometimes an initial sell-off is actually a good time to buy a turnaround company. However, it should raise an alert in your mind – do you think this is a once-off or would you rather put your money, and your risk, somewhere else?

It’s “fashionable”. This is also known as the “taxi-driver rule”, which is unfair to taxi-drivers in my opinion because, apart from the ones who can never find my house (the house on the corner with the same number is actually the same number of the OTHER street!!!!), most of the taxi drivers I know are quite sensible. But the idea is clear – if everyone is calling the stock a “buy”, then there is nobody left to buy it and hence the outlook is limited due to a lack of future interest. Or, to put it another way, from the top, the only way is down.

The “trend” is your friend, but with friends like these…A little like the rule above but broader. For example: it’s a low interest environment, so lets all look for companies with high yield; or no-one goes into shops anymore, so lets buy defensives and internet retailers. Whatever the trend might be, it’s important to be aware of what’s driving the share price. The companies themselves might be okay but the share prices might be a little too high. Don’t be afraid to go against the trend if you think it’s looking overdone.

Changing tastes – so maybe the trend is a bit overdone and reversion will eventuate (as an example, we might decide that a little customer service is worth a little extra money) or…perhaps not. Knowing when a trend signals a significant change in the way business is done or the way we live our lives is very difficult, but if it’s permanent, it’s time to get “with it” or get out (remember Kodak?).

It reaches your target. Almost everyone gave this as their first response. But what does this really mean? Stock brokers are notorious for increasing the target prices of companies as the actual share prices rise and I’m the first to confess that this tends to happen to me too. Should we be more disciplined, using the equivalent of an automatic stop-loss but on the upside, sort of a stop-gain? I don’t think so. However a real loss “hurts” more than the opportunity cost of not participating in the full price rise. So if your initial target is reached, it seems like a pretty good idea to take the rose tinted glasses off and seriously consider if the future can continue to be so rosy.

In the end, your investment “pantry” should look a little like the real thing. A few staples, like some flour, salt & pepper, tinned tomatoes and rice. Not exciting but necessary. And then add to this a few more interesting and exotic things, such as maybe some curry paste, quinoa or tamarind. Just to add some spice. So long as it’s all within the best before date. And it doesn’t smell a bit iffy. And you know what it is…you get the picture.