Smart Investor: back to basics to beat the market

Would you have any links/articles on the basics of company valuation?

I'm also new to bonds, (probably shouldn't be), but what are the best funds, as i assume it is best to invest in bond funds rather than individual bonds.

with DataAndy - ditto.

I've ignored bonds/bond funds for a long time as they just don't seem to compete in return terms. And, to be honest, I really don't understand the ins and outs of bonds, so would rather use a bond fund and pay someone else for the headache of understanding all those strange pricings. But I've been looking at the different bond fund categories over the last few weeks and can't decide how much I should put into strategic vs corporate vs high yield funds - any suggestions on asset allocation or specific funds? Thanks

I have the Threadneedle High Yield bond in my SIPP. It pays monthly interest which equates to 8.24% on an annualised basis.

So far this year value of bond has only fallen by 0.85%

Well I suppose if you believe in theology, or astrology, you may feel inclined to follow these edicts. Personally I don't. I believe in the here and now, and the history of human endeavor which has brought the economic world to this point in time. Basically free market economics is knackered. Logical, and academic models don't work any more.

The fact is we are all trying to walk up an escalator which is going down. The economic electric current is flowing in the wrong direction to the motor. Eventually events will cause the direction to reverse and the escalator will start running normally. Until that happens the best we can do is to keep running in the hope that we can stand still!!

My strategy: (for what it's worth) is now wholly oportunistic. 80% cash with instant access, 20% equities, 0% bonds.

The only shares I'm interested in are special situations. To find the few grains of wheat amonst the chaff I have to do an awful lot of winnowing. But, thanks to the internet, the difference now is that there has never been a time where an investor could find so much data and information to base his/her research and analysis.

Spot on, Hotrod. We live in dangerous and almost unique times, so beating the market means not losing your capital. I sold all my shares and commercial property in 2007, leaving me with an asset allocation (ignoring my house) of 75% cash and 25% gilts.

As of today my asset allocation is back to 30% shares, 25% index linked gilts and 45% cash. I'm thinking again of a drastic reappraisal to 0% shares, 65% cash, 25% index linked gilts and 10% physical gold. I'm giving serious attention to spreading my cash around several banks and BS's.

By keeping at least 25% in bonds and 25% in shares, do you guarantee that at least 25% will be in the wrong investment at any one time?

Since last November I have been 5% shares, 45% cash and 50% index linked gilts. Probably stay this way for the next six months or until the FTSE goes below 5000, whichever is the sooner.

Instead of trying to guess where cycles begin and end and their amplitude, you could adopt a 'permanent portfolio' approach, rebalancing your investments annually to ensure they remain in a set percentage configuration.

This passive strategy has been shown to equal or beat market returns in all conditions. It needs minimal maintenance and no expertise in reading entrails. Nowadays passive investing can be more cheaply conducted than ever before, thanks to the emergence of low-cost ETFs.

Ideas here:

http://monevator.com/category/investing/passive-investing-investing/

It is difficult to understand how an investment decision can be made without knowingly or unknowingly weighing up changes in the investment environment and how they would affect your investments. We all do it even though some of us may not be trained in logic.

It's not too difficult to learn enough to run a small portfolio as auhor pointed out in an earlier article. Once again, the article which seems to have been based on his rich and personal experiences, the author has reminded us to move between shares and bonds, get into habit of screening your portfolio in between boom abd bust, choose good companies and you will live to see their fruits.

Thank you William, an interesting site. In general I agree with you; Keynes certainly made a lot more money for King's College after he adopted that strategy. My problem is that I avoided a huge loss by selling in 2007 (at 6300) and am getting the same sinking feeling. I discovered the power of investing as markets fall in 2000-2003. So my main strategy is to buy as markets go down, which means you don't have to try to predict the bottom. However, in order to do that you have to be liquid, which may mean liquidating funds - that was the real reason for liquidating in 2007.

@Tractorboy 11 - well I do have the Aegon HYB, which has outperformed the Threadneedle one in every period, but I'm wondering whether this isn't a rather risky area to be in at the moment?

The truth is that over the last few years all bets were off. Since the so called "credit crunch" we have seen good returns from both equity and bond funds, so moving between the two would have merely generated needless charges for many clients, and also cost them time in the market.

It concerns me that many advisers still do not appear to understand how bonds work, and even more so that many other advisers think they have they ability to pick the best performing stocks on a consistent basis - if this is the case get out of advising and start your own fund!

I don't use an adviser - I realised very quickly that I knew almost as much as they did (I used to work in financial services marketing and my husband works as an investment fund consultant in the City). I do my own research, check my positions every day and rebalance every month at the moment. I have a lot in cash (sitting in high interest deposit a/cs waiting to pay off the mortgage when interest rates finally go up) but feel at least some of it should be sitting in a couple of decent bond funds.

Drake - Buy (I take it you mean shares) "as markets go down, which means you don't have to try to predict the bottom"?

Take an example : You buy Lloyds Bank shares at £5.00 as they are falling. They continue to fall to £2.50, which, it turns out, is the bottom. They then start to rise again. They have to rise by 100% before you get your money back (ignoring inflation over that period). If you wait for the bottom of the market and pile in again when the share is at £3.00, by the time the price reaches £5.00 you are 67% up. Would you rather have 0% or 67%?

Buying while the markets are falling is the easiest way in the world to lose money. But please don't stop doing it - there has to be somebody willing to buy my shares when my 20% stop-loss triggers . . . .

Dear Maverick,

Taking your example, I would be making several purchases of the same stock as the market falls. Thus I would be making a number of purchases below £4.00 when you will not be buying because your stop loss has kicked in. As the price rises from £2.50 I start making money very quickly on my latest purchases. By the time the share price is back to £4.00 I will have made a good deal of money. Your mathematical point about having to climb in percentage terms more than a stock falls is of course, as Oxford mathematicians would have it, trivial. The same point applies between £2.50 and £2.51. I suggest you have a look at Zeno's Paradox.

There are plenty of ways of investing, as these interesting debates show. Thank you for your encouragement - I won't stop doing it. I have made a large amount of money using this method; I don't have to work, I spend my time reading Classics, travelling, seeing friends and family, doing charity work and playing tennis. Each to his own, as they say.

Drake - The Oxford mathematicians who say my point is trivial were all discussing theory on fat academic salaries, whereas I have to live on my SIPP investments.

You have to offset the losses you make in buying shares on the way down from £4.00 to £2.50 before you can say you have made a good deal of money on the ones you bought at £2.60. Besides which, you clearly are "predicting the bottom".

I am glad you have made a large amount of money. I just don't like the idea of losing money by gambling on how low the price will fall. As you say, each to his own.

Maverick, I'm sorry to labour the point, but those who bought the FTSE at 5000, then 4500, then 4000 made more money than those who sold out at 5000 (or worse still didn't sell at all) and then waited for the market to get back to 5000 before buying again. My point is that there is no gamble (and I don't need to predict the bottom) unless you think the market will NEVER revive. I will concede that it would have been a risky ploy in 1930 and may be if Greece defaults, which may be sooner than people expect.

En passant I can tell you that academic salaries at Oxford are far from fat. Most of the dons earn less than a 24 year old newly qualified accountant or solicitor.

Anyway, it's pax I think. My suspicion is that we both invest a little more subtly than we have been protesting.

Drake - Pax, as you say.

My approach would be to wait till I was reasonably sure the rise was not just a "dead cat bounce", and then buy.

But I've come to the conclusion that I can't beat the market and I won't trust to luck. Some companies look wonderful on paper, have 100% rock-solid annual accounts, have exposure to emerging markets, etc etc, but the market still doesn't like them. Logic is of very limited use. What I do is to follow what the market does and to try to draw conclusions from it.

I do find the views and strateges of citywire readers really helpful, there are some very astute people out there who make you think outside the box. I would like Citywire experts to take on board some of the views expressed and include/answer them in future articles.

To Kenneth - is thinking outside the box a suitable stratagem for losing money on the FTSE casino faster than would normally be the case?

For astute read self denial verging on delusional - the greater the finance-babble the heavier the loser. See also chartists, analysts and all the other financial faith healers and snake charmers. In pre-FTSE days these people would have been showing the three card trick to the easily impressed.

Rustie - There's one fairly big difference between me and a three-card trickster - I put my money where my mouth is. I am retired and living on a SIPP. If it works for me then perhaps it might also work for others, which is why I comment on these message boards.

However, like Socrates, the older I get the less I think I know. But I don't regard investing as gambling, and I know a guy who makes a living playing poker, and he says that's not gambling either.

If you want to stay thinking inside the box, you can buy all those dull-as-dishwater shares like BAT and Tescos and Vodafone, and drone on and on about what wonderful dividends you're getting, while your underlying investments are dropping in value.

So if investing isn't gambling - you actually know what's going to happen then?

Ok Maverick - show me your results over the last 12 months.

If poker isn't gambling, what is it?

Rustie - It's almost impossible to give exactly accurate figures, as everything is moving all the time - for example, the SIPP has the pension taken out of it each month, but also had a tax refund credited to it in the last year - but if you take out this year's contribution to my ISA, that gained 33.8% over the last year.

That's no great shakes - if you regard what I have as essentially the same as an investment trust, Trustnet shows that 102 investment trusts managed to beat that over the last year . . . . But it keeps me off the streets.

My point was that making informed guesses and taking careful note of what the market is actually doing takes investing out of the realms of gambling.

The poker player I know is extremely dyslexic, and reckons nature has compensated by giving him an incredibly good memory - he's not quite in the Dustin Hoffman "Rain Man" class, but getting on for it. Poker is one of the few games where a good memory can beat the dealer.