Good morning! Well no profit warnings for me this morning, so far, so that's a good start. Ramridge posted an interesting comment after yesterday's report, saying that he'd crunched the numbers, and according to an EY report, 2014 was a record year for profit warnings, and the rate is about 15% - so if you have a portfolio of 50 shares (roughly what I have) then you should expect 7-8 profit warnings per year.

If you invest more in small caps, then the profit warning rate will probably be higher, because smaller companies usually have less earnings visibility, and can be heavily dependent on a few contracts, customers, staff, etc (e.g. Thorntons (LON:THT) this morning saying that their fall in FMCG sales is down to one customer).

This got me thinking about the margin of safety. With markets now fully, or over-priced for many, maybe most, small caps, I am increasingly firming up my view that it's dangerous to pay such high prices for stocks, because you then have no margin of safety if/when something goes wrong.

Also, if 15% of your stocks are going to warn on profit, then you have to be sure that the other 85% have enough upside potential in them to more than make up the shortfall. So if you're paying toppy prices for fashionable stocks with strong momentum, where is your upside going to come from? More momentum? So what happens when momentum eventually breaks? I think it could get very messy when eventually buying the dips stops working.

With us only days away from the start of "Sell in May and go away", made worse by General Election uncertainty this year, I'm thinking about putting a self-imposed ban on opening any new long positions, and possibly trimming back a little on existing long positions, and maybe opening or increasing a few of shorts on over-valued stocks.

What do readers think? Do you follow the (statistically proven) sell in May approach? Comments in the comments, below.

Benchmark Holdings (LON:BMK)

Share price: 82p (down 26% today)
No. shares: 219.3m
Market Cap: £179.8m

Profit warning - if the share price drops sharply on a trading update, I rename it here as a profit warning, for clarity. Shares in this fish medicines group have dropped sharply this morning, although they've bounced somewhat from the…

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