Often you look at a company's results and notice that sales and/or profits have gone down sharply. Something isn't necessarily wrong here, although things certainly look that way. For instance, the company may have sold off some of its divisions, in which case the fact that turnover has dropped isn't very surprising. Conversely, of course, buying up a competitor or expanding rapidly may have boosted its headline profits.

Shop chains are especially vulnerable to these sorts of distortions, because retailers are continually adding and subtracting premises from their businesses.

But the situation is different if like-for-like profits have fallen. This means that, when the accounts have been adjusted to take account of the changes in activity, they're still showing a drop in activity. That's bad news, and you shouldn't dismiss it lightly.

Often, a company that isn't doing particularly well issues an improbably large dividend to its shareholders, pretty much as an incentive to stay aboard the sinking ship and not dump the shares. Indeed, this may happen even if the company's making losses and not profits at all. Now that's a pretty urgent sign that you need to take a closer look.

Of course, good reasons may exist for the dividend being so large. The company may have a lot of cash in the bank, perhaps because it's sold something off, or it may have decided simply to treat its shareholders.

At times like these, the dividend cover figure's a really good way to check the soundness of a company's ability to pay its dividends. The figure tells you the multiple between its pre-tax profits and its dividend. A ratio of two (at least) is generally healthy; a figure of one denotes that the company isn't keeping any cash back for developing the business; and anything less than one's simply going to be unsustainable if it continues for very many years at a time.

Chapter 2 describes dividends in detail.

Chapter 10 talks about charts, and why some people don't like them very much. Forget about all those pretty patterns on a piece of paper, they say, and focus your attention instead on the fundamentals that make the company what it is. Profits, losses, balance sheets, and business performance – that's what everyone really wants to hear about. None of this faffing about with charts, please.

Well, up to a point I tend to agree. But one of the places a chart can really score is when it tells you how the stock market's current valuation of a share compares with its average valuation over a longish period. The long-term 'moving average' figure helps you to screen out all the little ups and downs and focus your attention on the underlying picture instead. And a chart that shows how this moving average has behaved over an even longer period is better still.

For instance, if your shares have averaged 200p over the last nine months but they're 180p now, you know that they're cheaper than their recent historical average (obviously). But that may simply be due to a short-term statistical bump in today's price. You have a much better picture of things if you can see on a chart that two months ago, the 200-day average was still only 200p. In that case today's price probably isn't much to worry about. But if the 200-day average shows a curve that's been going up from, say, 150p and your share price has just lurched downwards, then you've got a different situation on your hands, and you at least need to stop and find out why this is happening.

Of course, the whole market may just be going downhill, in which case you may not have much to gain by jumping ship unless you're going to sell out into cash. But seeing these things always helps.

You can choose how long you want your moving average period to be, but 200 days is a popular choice. That's 200 trading days, of course, excluding weekends and bank holidays, so it's roughly 42 weeks in 'real money'.

A company director selling a big batch of shares in her own company always looks bad. If she's one of the company's insiders, what nasty secrets does she know that are encouraging her to get out?

That's being a bit negative, of course, and a perfectly valid reason may exist. If a company's founder has put everything she's got into building up a business, why shouldn't she sell off a bit once she's turned it into a success and buy herself a well-earned new home or a Caribbean island with the proceeds? People forget too easily that the business itself is a very large part of what many business people own, and often they can't enjoy the fruits of their labours (or even retire) without cashing in some of their shareholdings.

But the stock market is rightly suspicious of director dealings. That's why every such sale or purchase is published in an official Stock Exchange Regulatory New Service statement, so that everybody can examine the evidence and make up their own mind.

A sale that happens just before the company goes into its annual 'closed period' is doubly suspicious. That's the month or so before the company's due to present its annual accounts and silence descends on the PR machine. If a director chooses the day before the closed period to make a big sale, then she's a fool because the stock market always suspects the worst and the share price is likely to plummet.

Consider the pub trade in Britain, which got into bad trouble in mid-2007 after England and Wales introduced a ban on smoking in licensed premises. The nation's nicotine addicts were quickly persuaded to start buying their booze at Tesco and drink it at home instead of paying a landlord to pour it for them. Clear statistical evidence existed from Ireland and Scotland, which had already taken this step, that non-smoky pubs were good for families but bad for beer sales, but for some reason nobody saw the problem coming. Those who did, and who sold out of pub chains, saved themselves a 75 per cent fall in their shareholdings, and sometimes more.

Or consider the British steel industry, which is now effectively a subsidiary of the Indian steel industry. By the time that Tata Steel had bought up the Anglo-Dutch steel company known as Corus in 2007, the last vestiges of Britain's former steel operator, British Steel, which formed the main part of Coruis, were already struggling with a welter of problems. Not only were Corus's steel plants in Wales and the north of England getting rather long in the tooth, especially compared with leaner and more recently-equipped rivals in Poland, India, South Korea and China. They were also in the wrong part of the world to take advantage of the emerging-market boom in a material which was, after all, rather heavy and costly to transport. In 2009, with raw steel prices still falling, the prospects for British steel manufacturing plants was looking bleaker than ever.

Thus, it was mainly geography rather than politics which decided the fate of Britain's steel heritage in the 21st century. In America, however, the steel mills were just as antiquated (in fact they were worse), but they benefited from preferential government treatment that kept them viable for much longer than their European counterparts. There's no justice.

If your company depends heavily on selling stuff to another company that's in trouble of its own, or to a country that's experiencing an economic crisis, the stable door may have been open for too long for you to make a satisfactory exit – in which case you may have to sit tight and wait for a recovery. But if you can anticipate the problem in advance, then you're on the way to becoming a skilled and successful investor.

What about national markets that get holed below the waterline? Well, you could probably see in advance that cars weren't going to sell well once the oil price had trebled in 2007/2008. And by the time the stock market crisis of 2008 had kicked in, nobody was buying cars because people were simply trying to hold onto their savings! But unexpected scares and other temporary factors are harder to anticipate. Political factors can make conditions suddenly hard for an exporter to do its stuff.

How do you arm yourself with the materials you need to fight this problem? By reading as much as you can, as often as you can. The review sections in financial newspapers, the television news, and magazines such as Time or The Economist help to keep you abreast of current macro trends.

Chapter 3 has the lowdown on relating what you read to market realities.

Mergers are generally good news for investors, unless they're trying to make income from their investments rather than capital gains. You don't often find a merger going through for less money than the company's worth at the time (as measured by its market capitalisation, the stock market's favourite measure of company size. You calculate the market capitalisation by multiplying the share price by the number of shares in issue.). That's because the merger deal requires approval by a large majority of shareholders, and they're not likely to settle for anything less than they've already got.

But a share's price rising quite dramatically during the run-up to a takeover is common, especially if several bidders are competing with each other for the honour of acquiring the target company. Things can really get a bit overheated in these situations, and you often find that some investors (very sensibly) sell out to one of the bidders while the battle's still going on. In this way they can lock in their gains, just in case the whole situation comes unstuck.

Which it does, quite frequently. The collapse of a merger approach can do terrible damage to a share price, and the price is not unknown to fall below its level before the bidding war started. If you feel that the talks are going nowhere – or (horrors) if one of the bidders discovers something it doesn't like in the company's accounts (which it can scrutinise once the takeover process is under way) – then you may want to get out while the going's good.

I mentioned just now that mergers can be bad news for some income investors. Here's why. If you're already using all of your annual capital gains allowances but you're not earning enough to pay income tax, you're one of those people who prefers a steady income stream to a series of capital gains. An unwelcome takeover of your company dumps a pile of cash into your account, which attracts capital gains tax at the highest rate you personally qualify for. (At the time of writing this was 18 per cent, which was slightly less than basic-rate income tax.)

I talk more about merger approaches in Chapter 8.

Chapter 8 takes a look at the way recent legislation has changed how people look at company pension valuations. Generally, companies now have to post details about the state of their pension funds in their annual accounts, because the pensions they're running for their employees' futures represent a real liability for the future. They need to have made proper pension provisions in advance if they're not to be swamped by a massive surge of pension claims that they haven't got the cash to deliver when the time comes.

These days, for all the reasons I mention in Chapter 8, companies' pension pots are much more visible than they used to be. But because the pension plans include an awful lot of shares and other volatile investments, their values can rise and fall pretty dramatically from one year's end to the next. And that's where the 'black holes' come in. Many large and profitable corporations have found themselves with alarmingly large commitments of cash that they simply haven't got. Either they have to make up that cash somehow, or they find their share prices being driven down by bearish investors who figure that the pension shortfalls are going to erode their standing, and even their stability, in the future.

Not very surprisingly, companies are now fighting back by trying to reduce the numbers of their employees who qualify for 'defined benefit' pension plans (where the company owes them a certain amount of money in retirement, no matter what the situation is) and switching to 'defined contribution' pension systems, in which future pensioners have to take their chances and accept whatever the market happens to give them when they leave the company.

What can you do if you see a big black hole appearing? Well, first of all don't ignore it. Find out whether the problem's being caused simply by the temporary state of the stock market. Figure out whether the company's taking steps to restrict the growth of the problem, for example by shifting its workforce across to 'defined contribution' pensions that carry less risk.

Then, if you decide to sell, choose your moment carefully. Unlike a stock market shock, a pension shock probably emerges only very slowly, so the chances are you have plenty of time.

Mergers are expensive, inconvenient, and sometimes divisive, and companies need to have pretty good reasons for going into them. The most important reason is that they can make some cost savings by combining two operations. So a paper manufacturing company may well save money by buying a forestry firm.

But in the 1970s and early 1980s a veritable flood of mergers took place that really didn't make much sense at all. The brick manufacturer Hanson bought up clothing retailers like United Drapery Stores, cigarette manufacturers like Imperial Tobacco, and even a couple of health supplement manufacturers. When Hanson tried (and failed) to buy Imperial Chemical Industries in 1991, people began to realise that this strategy showed no sense, and soon Hanson's share price crashed to the point where the group was quite lucky to survive at all. The era of conglomerates was over.

Except that it wasn't. In 1998 Germany's Daimler motor company bought America's Chrysler car maker, with fairly disastrous consequences for both companies. Whereas Daimler's focus had always been on up-market excellence at premium prices, Chrysler's model range was decidedly mass market, with relatively poor manufacturing standards. Most Chrysler cars were effectively unsellable in Europe, and this quickly became apparent. The synergies between the two companies were almost non-existent. Meanwhile Daimler's attempts to enforce German-style management methods on the somewhat more entrenched Chrysler workforce led to a series of industrial conflicts, which Daimler eventually resolved by selling Chrysler to a private equity company in 2007.

The DaimlerChrysler experience proved bruising and financially damaging for both companies. If you ever see two unlikely companies being forced together – a bank and an insurance company, a food manufacturer and a chain of chemists' stores, or an airport operator and an oil producer – think very hard about whether the marriage is likely to prove harmonious. And if you can see the glue coming unstuck in a company you already own, run.

Problems don't get much worse than this. You might think it sounds like a good thing for the accounts to be qualified, but take my word for it, it means pretty much the opposite.

When the auditors qualify the accounts, it means at the very least that they haven't been able to substantiate every transaction the company claims to have made. And at the very worst, they want to distance themselves from what may turn out to be an iffy situation. When you hear that a major company has changed its auditors, you may want to do a little digging to see whether the auditor or the company was unhappy with the situation.

Corrections can happen at a lower level too. The regulators can occasionally insist that a company 'restates' its results, perhaps for a number of years going backwards. One British company was caught 'padding' its sales figures a few years back by encouraging its wholesalers to buy much more than they needed at the end of every trading year, – thus giving the impression that turnover was much healthier than it actually was. In that case, the results were backdated, the chief executive and the finance director resigned, and no further action was taken. But the stock market exacted a cruel revenge: the company's shares plummeted because everybody had lost confidence in its figures. Only after nearly five years and a big corporate restructuring did the company find its way back into favour.

Chapters 8 and 9 look at interpreting auditors' and regulators' reports and knowing how to respond.