# We're in the money...# ? Doh!

Tuesday, 1st May 2018 12:43 - by Ranjeet Singh

After the shock announcement over the weekend of Sainsburys and Asda potentially merging to create a £10 billion behemoth retail giant that will surpass even the monster that is Tesco, I had a lot of questions about how this position should be traded i.e. how to make money from the deal.

So today I’m going to share with you some simple strategies. Now remember, as I always say with my articles, I am not giving investment advice and I’m not encouraging you to take any sort of action. I’m just sharing what I know and hopefully you will take some value from it. Right, that’s the risk disclaimer out of the way let’s do this.

1. The first thing is never to chase the market. At 8am yesterday morning, on the market open which was the first trading day after the merger was announced, the shares price of Sainsburys was trading up 20%! And yet I saw countless people trying to jump in and buy shares on an execution only basis. I, on the other hand, was advising my clients who already held the position to take their profits and run, which is exactly what they did. The reason was simple – it’s because I know that there was so much hype surrounding the merger that it would almost certainly be over-valued in the short term. Lo and behold, that’s what happened – it eased off and selling was the right thing to do. That’s not to say that the share price can’t get back up there and over the next few days it probably will but the volatility will be such that you can always get back into the market so take what you can, when you can and run.

1. Forget the buy and hold strategy with this one. A lot of investors are buy and hold strategists (which basically means that they don’t actually have a strategy – they just buy and hope for the best in the long term). However, for this particular scenario you need to trade to get the full value out of it. Sainsburys for example was up 20% at 8am and by 830am it was ‘only’ up by around 13%. In other words, there was a 7% move in that half of an hour. That’s the equivalent of what some investors would be happy with for their total annual return on their portfolio.

Now I’m not suggesting that you would have caught the top or bottom – for example you may have sold when it was up 19% and bought back into the stock when it was up by only 15% but that’s still 4% in the money. Of course, you need to look at the costs of dealing and commissions etc. but if you do a spread-bet or a CFD then there is no stamp duty to think about. Even if you trade on the underlying equity position it should only cost you £10 to buy and £10 to sell and then 0.5% for the stamp duty on the purchase. By the way I’m not advocating leveraged products, I’m just showing you how to invest and avoid paying stamp duty which for a short-term trade like this makes sense.

In other words, you need to understand that if you see an ‘exceptional’ or unusual piece of news then you should use an exceptional or unusual strategy to match. Otherwise you have failed to take full advantage of the offering. Yes, you can still make money and you probably will but you will kick yourself as you could have made a whole lot more.

1. Never trade on the market open. This is another mistake which just kills your profits. I have nearly finished my book “The 13 Insider Trading Secrets that will blow your mind” and my first tip (or technically Tip 13 because it’s in reverse order) is exactly that – don’t trade in the morning between 8am and 810am. That’s because the spread is at its widest point in the morning due to a lack of liquidity and that makes any buying or selling prohibitively expensive.

Investing is not just about picking good shares and having good timing, it’s as much about the efficiency with which you execute and that’s something that can make all the difference. It’s something that I pay particular attention to which is why I usually prefer to use ‘limit’ orders rather than ‘market orders’ – in any case you can now have a lie in and not feel guilty – just don’t trade until at least probably 830am once the market has really settled down, not just because of the wide spread but to also get clearer direction of the move ahead for the day.

1. Don’t pay a high premium for a small amount of potential gain. Trading is all about risk and return and often in the case of a takeover, investors will hold on until the last day expecting that the deal will go through. But in many cases the Competition and Markets Authority and other regulatory bodies may not allow the takeover to go through.

So, the question is, whether it’s really worth holding out for that last 10p (which might only represent say another 2 or 3%) and because of this be forced to undertake the risk that the whole deal could fall through. It’s a very poor trade off if you think about it – if the deal fails you could see the position fall by say 20% (or whatever the price was before talks of the merger/takeover) and if it goes through then you are only getting another 2% on the upside. That’s terrible – you are getting 1 to 10 on your money so you better be at least 90% sure that the deal is going to happen. Or better still I would suggest just take your money and run.

1. Be contrarian is key. With takeovers and mergers, it’s all too easy to get caught up in the hype and follow the other investors like sheep. That’s not the way to do it. You can easily get caught up in the ‘noise’ which can affect your judgement and you may begin to blindly follow the crowd. Worse still if you are slow to react and the crowd moves first, then the chances are that you will be buying after the value has come and gone. In other words, if you buy after all of the news is out there, then you probably are standing towards the back of that queue and that’s where all the risk is. It’s like going to a party and the last ones have to tidy up all of the mess. You don’t have to be the first one out of the door but you better make sure that you are definitely not the last.

And if you can’t be sure that you won’t be at the end of the queue then a fool proof of making sure that you are not is to be contrarian which is what I prefer. When people are buying you sell and when people are selling you buy. You may get it wrong from time to time but you will definitely never be the last person to leave the party.

One final last tip (because I’m feeling particular generous) that I would give is this - if you ever happen to find yourself in the very fortunate position of being the Chief Executive Officer of a major, FTSE100 retail food company that just happens to be merging with a major, US owned retail food company, and as a result of that you are going to be handsomely paid off to the tune of several million pounds, try to calm yourself. However strong the urge may be to sing a song, try and fight it, particularly if the song relates to making lots of money and you are about to go live on national television.

Call me old-fashioned but I just don’t think that it looks good if you are seen boasting about how much cake you are about to bake at exactly the same time that thousands of store employees are worried about losing their jobs. However good your singing voice may be, just save it for when you are in the shower.

Here’s todays video https://youtu.be/hWiFT8TLjDs

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.