Citywire printed articles sponsored by:

View the article online at http://citywire.co.uk/money/article/a541168

Smart Investor: you don't need to be a genius to beat the market

Intelligence is no barrier to making money from the markets, says Smart Investor, you just need to stay disciplined.

Markets

Other markets

Market Data Notice

More market charts

by Smart Investor on Nov 22, 2011 at 06:00

Follow SmartInvestorUK

Smart Investor: you don't need to be a genius to beat the market

Intelligence doesn't equal investment savvy, says Smart Investor, and anyone can learn the rational approach to picking stocks.

Learning from experience

Throughout life, we all learn important lessons. When it comes to investing, the lessons learnt are often a result of making mistakes, so we first learn how not to do things, and then seek out the way to profit from investing over the long run.

However, a number of the lessons I have learnt have come not only from my own mistakes, but from observing how others go about trying to generate capital gain, income or both from their investments.

I've had the luxury of learning from various financial services professionals and have observed some rather strange goings on. Something I noticed in my very early days was the lack of a link between intelligence and successful investing.

This may sound a strange: surely an investor must be intelligent to be able to generate returns from their decisions? After all, a certain degree of intelligence must be required to understand a set of accounts, the technical terms and all the jargon that comes with shares and the stock market.

Intelligence isn't enough

However, intelligence really has no bearing on your ability to invest successfully. An ability to read and write to a high level is simply not required. I have met people who are incredibly intelligent, academically among the very best. They can explain everything there is to know about shares, the stock market, the economy, and have all of the complicated methodology down to a tee. They come across well, are exceptionally persuasive during debates and are respected by their peers.

Unfortunately for them, none if this matters when investing. I've also have met incredibly successful investors who most would consider to be of only average intelligence and have not been to university or, in many cases, gained A Levels or O Levels. Yet these people are able to generate returns far in excess of anything mustered by the 'intelligent' set.

When I first realised this, it was something of a 'eureka' moment. I decided there and then that I would only amass knowledge that would be of use to me when investing. Since I could not change my level of intelligence, I instead focused on providing my brain only what it needed in order to invest successfully.

Focus on the essentials

I did not need to know all the ins and outs of currency trading, I did not need to obsess over pro-forma analysis (or in other words purchase a crystal ball) and I certainly did not need to read page after page on how the euro is organised.

Does this put me at a disadvantage? Absolutely not. That's because I decided that honesty was the best policy, so at a relatively young age I accepted that I was unable to predict the future, and would have to rely on a company’s past performance when deciding whether to invest in it.

I decided that a company’s financial soundness, its business model, economic moat, past profitability and returns, cash flow, and various other measures would tell me whether or not to buy. Furthermore, I quickly realised that the price at which you buy is crucial; better to be sat on the sidelines than to pay too much for a piece of the action.

Having decided which ratios were important, I spent time reading up on them, making sure than I knew them better than anyone else. For me, if I didn’t need to know something, I didn’t care about it.

Email a friend

Email me when someone comments on this article Print

9 comments so far. Why not have your say?

Smart Investor

I looked up the word 'smart' and it seems to have connotations with intelligence!

'smart

adj

1. clean and neatly dressed,

2. intelligent and shrewd,

3. quick and witty in speech, a smart talker'

So - are you all three above?

I'd be interested to know what you would have done with a share like LLOYDS.

1. When, if ever, would you have bought? Why?

2. When would you have sold? Why?

I still await your article on corporate bonds and wonder how long you are going to take to give your reasons for avoiding this area of investment.

Like yourself I instinctively dislike debt.

I am beginning to feel that investing in corporate bonds is slightly unethical as I am making money out of debt rather than directly investing in the future prosperity of a company.

To tell the truth, I am literally SCARED of taking what I consider to be large risks by buying shares.

The unknown is always frightening and a pure gamble for somebody like myself lacking knowledge of the key fundamentals to look for before making sensible, informed investment decisions.

report this

@Robert Court:

If you find owning shares scary, perhaps it is not the thing for you.

In similar circumstances I found it very helpful to be able to rationalise my fear, and the best way for me was to read William Bernstein's book "The Intelligent Asset Allocator". He looks at the extreme long term to derive portfolios with certain percentages of bonds, cash and equities.

In table 8-1 he shows what you can expect to 'lose' (actually pullback from peak) in market crashes, depending on how much of your portfolio is invested in equities vs fixed interest. Astonishingly I found it to be quite accurate in the 2007/8 crash -despite bonds and equities tanking together. Incidentally, if you had been in 100% equities then you would be predicted to pullback 60%.

I found it amazing that figures based on US data were good predictors for my UK-based portfolios. It did not prevent that highly uncomfortable feeling when portfolios reduce in value, but it does avoid that feeling of panic and enables you to take a more considered view.

report this

Hi Smart Investor,

I've read you articles for quite a while now and have only just wondered what your returns have been. I might have missed it in previous comments but could you tell me how you have done over a 1, 3 and 5 year term? Can you give a longer term, if available?

Thanks

report this

Hello Robert,

I do not see your logic in thinking Corporate Bonds are unethical. They are one of the major sources of finance for Companies like equities and the other variations.

I wish I had your expertise in analysing, valuing and dealing in bonds in bad times like now, as equities as an asset class have been underperforming for some time, but it would appear (thanks Phil for reference to Phil Bernstein's book) that both skills are definately needed for best preservation of our hard-earned savings.

Of course one can just use OEICs but they just gravitate to the mean less their increasing and hidden charges.

Final point, I think Lloyds is a bad example of a share to invest in and for me ticks all the wrong boxes as a pure gamble as has been proven by its depressing performance. There are many other better companies where the odds should be stacked in our favour if bought at a reasonable valuation, making the risk more tolerable especially if spread in sectors.

report this

John Osborne

Thanks for making me feel less guilty!

I agree 100% that Lloyds is NOW a bad example of a share to invest in other than pure gambling short-term speculation; I was just wondering if it had been a good share to invest in several years ago and if at any time 'all the boxes had been ticked' and then how a 'smart investor' would have reacted as the boxes ticked became rather large crosses!

Forgive my ignorance, but what's an OEIC? (jargon is ok if you are in the 'infoset' but assume I know nothing and you'll be 99% correct).

Re. bonds I am suffering a small paper loss (i.e. the present market is less than the purchase costs on many bonds even if I picked them up at depressed prices).

The income is, however, relatively secure and if the companies survive I'll be guaranteed handsome capital gains on top of the high yields I already enjoy as annual interest on the purchase price.

PhilB

Many thanks for your suggested book.

It is strange that I can feel perfectly comfortable when corporate bond prices go down [provided not catastrophically] yet I suppose it's logical that I would feel insecure when share prices do the same if I am ignorant of the fundamentals.

Both (+ Smart Investor)

I believe that a good portfolio should be diversified in risk and sectors and countries and currencies without being over-complicated for a simple person to manage without too great a complexity.

I prefer to handle a relatively small number of investments (around a dozen) rather than the 20 to 30 I feel should probably be more appropriate.

Since reading and 'contributing' these forums I have come to realise the advantage of holding a certain amount in cash although I find it very hard not to resist the temptation to get back into the market and make my money worrk for me.

I do NOT feel happy at the thought of investing in managed investments as I feel the management fees are totally inappropriate. Taking a management fee as a percentage of the total value EVERY year even when the fund has gone down in value seems unethical to me.

Getting rewarded for losing a client money is just plain 'wrong'.

I'd like to learn the basic principles about investing sensibly in shares and I guess I'll just have to read up and gain some knowledge and do the necessary work to teach myself as I am sure no magic wand waving is involved!

Thanks & regards to you (PhilB, John Osborne & Smart Investor),

Robert

report this

@Robert An OEIC is an "open ended investment company" - basically the same as unit trusts. So, for example, the "Fidelity Special Situations Fund" is an OEIC. There are, of course, many others. Perhaps too many. OEICs are "pools" of money that investors contribute to, and are run my profressional money managers.

Contrast this with "investment trusts", which are closed-ended. They are quoted on the stock market and can be traded like regular companies (because they are regular companies). Unlike OEICs, the pool of money doesn't grow or shrink in relation to the how many investors there are.

report this

If we're into practical instruction books on how to invest profitably, the bible is surely Jim Slater's "The Zulu Principle". Advice in spades written by one of the most successful investors of a generation or more ago - and equally applicable to today's horrible markets.

report this

Twister

Thanks for explaining an OEIC.

Brian

Thank you also for the book recommendation.

Jim Slater........... he made a bob or two, didn't he?

'The Zulu Principle' sounds like a fun name for a serious book - the Zulus captured my imagination as a child as I always wanted to be a warrior king; there wasn't a 'Zulu' house at Cheltenham College Junior School so I became a 'Spartan' instead!

report this

Ken Adams

Nov 22, 2011 at 19:20

Robert

Sounds horribly character buiding

report this

Please sign in here or register here to comment. It is free to register and only takes a minute or two.