Learn to speak ‘City’

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I have previously shared my 10 rules for demystifying the stock market when going through an initial public offering (IPO). Having IPO’ed your business, the next challenge is fathoming City jargon and the old adages that stock market practitioners still adhere to.

It is better to travel than to arrive:

The market is essentially a discounting mechanism, so it is forward-looking. Good numbers can result in the share price falling as investors lock in profits; bad results can lead to a rise in the share price as investors conclude the worst is over and buy into the recovery.

In the short term, the market is a voting machine; in the long term, it is a weighing machine:

Technical matters, such as supply and demand, dictate in the short term, but fundamental, intrinsic value asserts itself in the long term.

Under promise and over deliver:

To outperform the market, company results need to exceed expectations, so good management under promises and over delivers. Satisfaction is performance minus expectations.

Be fearful when others are greedy and greedy when others are fearful:

Human nature being what it is, even ‘sophisticated’ investors lose their heads at the top of the cycle and their nerve at the bottom. Successful investors tend to be fearful – and sell – when irrational exuberance abounds, and brave – and buy – when fear stalks the markets.

Look after the E and the P will look after itself:

If management delivers on the earnings per share (E), the market will attribute the price (P)– and together these make the price earnings (P/E) ratio, the most common stock-valuation measure.

Cutting the dividend is the first or last thing a CEO ever does:

If a company is in dire straits, a newly appointed CEO is allowed to ‘kitchen sink’ the numbers to give themselves the best chance possible to turn around the business. In this circumstance, cutting the dividend to conserve cash to invest in the business and to cut debt is not unusual. However, cutting the dividend after a long tenure is seen as an act of professional suicide by an incumbent CEO, and usually heralds a change of leadership.

Don’t catch a falling knife:

When a stock is falling, buying it on the way down is akin to catching a falling knife – it can cause pain and financial injury.

Dead cat bounce:

This is a small, brief recovery in the price of a declining stock. A stock that has disappointed rises as investors buy it in the hope that it has hit rock bottom. It bounces on this demand, but falls back again until recovery is under way properly.

Profit warnings come in threes…:

like London buses. When trading conditions soften, management teams are often in denial and only reluctantly warn on the numbers, often calculating that it’s a blip. Once the blip looks like becoming a trend, management warns again, but assures investors that cutting costs will offset any further weakness. It’s only after getting locked into a cycle of chasing falling revenues and cost cutting that they throw in the towel with a third – often final – warning.

Dawn comes at the darkest hour:

After a third profit warning, pessimism overrides optimism; whereas management saw only growth before, now they see only decline. This marks the bottom of the cycle and is a great time to buy.

Bull and bear tack:

Every setback in a bull market is seen as a buying opportunity, with investors buying on the dips. In a bear market, every rally is an opportunity to sell into strength.

Sell in May and go away, buy again on St Leger Day: 

This adage advises selling shares after the AGM season, when market professionals’ thoughts turn to the summer holidays. Typically, volumes fall away and thin volumes distort prices and performance. Since 1950, the US stock market has returned just 0.3% on average between May and October, compared with 7.5% average from November to April. 

Lorna Tilbian is executive plc director and head of media at Numis Securities