Investment opportunities do not need to be at ground floor level

I recently met up with a pal who has been working abroad for several years to swap a few anecdotes and to share a couple of beers. He has been working in the Gulf assessing insurance risks at a time when there has been plenty of risk to assess and has, I assume, returned home with a tidy capital sum.

Before he left, he asked me to email him my newspaper column every week in order that he could “keep an eye on the stock market.” He has returned full of enthusiasm for investing in equities, something he has done haphazardly while resident abroad; it was, therefore, inevitable that conversation would turn to the stock market and its myriad opportunities.

“I’ve followed quite a few of your tips and they’ve done quite well,” he told me as we settled at the pub. I ignored the element of surprise in his voice. “They’re not ‘tips’,” I said, “I just write about what I’m doing in the stock market and how it affects me.”

It transpires that in addition to the weekly emails, my mate has been subscribing to a variety of investment magazines, occasionally following their tips before sending chunky cheques off to his stockbroker.

“So what forms the basis of your investment?” I enquired. Rather sheepishly, he admitted that his investments were made after reading magazine articles. No analysis, no further research, no overall strategy. It was an admission which entirely warranted the criticism I duly dispensed.
I did so because ‘casual’ equity investors continue to acquire shares after reading tips or by following fashion, rather than buying once they have established a strategy appropriate to their circumstances.

The Sage of Omaha himself, Warren Buffett, probably the world’s greatest equity investor, first establishes whether a company is worth buying after analysing its discounted future cashflow. Most investors use one measure of value or another, but it is important there is one.

Mr Buffett has often pointed out that too many investors employ a ‘stop-start’ approach to the stock market, an observation which has prompted him to dispense some helpful advice of his own. In one of his most famous lines, he urged investors to consider their motives for buying shares: “If they insist on trying to time their participation in equities, they should be fearful when others are greedy and greedy only when others are fearful.”

This could be interpreted as, ‘it’s more sensible to invest comparatively small sums, but on a regular basis.’

My pal, meanwhile, is all for taking the market by storm, eager to unearth a hidden gem that will provide considerable capital gains. There is no need to search the woods for what could be overpriced or illiquid investments, I told him; the place to look is staring you in the face: the FTSE 100.

For proof, look at how the stock market has finished today, with the FTSE100 up at 6,347, then look at the stocks that have enjoyed the greatest rise. Biggest riser of the day? BT – up by an enormous 6.5%, while Anglo American, another FTSE100 stock, has surged by 3.5%.

I’ve just spoken with my mate who continues to search for that equity rainbow, the big-hitter that’ll produce massive returns in a comparatively short period. He seemed quite disheartened at today’s information, as though he has missed the FTSE 100 boat. Not at all, I  told him, because focusing on these large caps makes enormous sense - just analyse them properly before taking the plunge. At this point I reminded him he owes me a drink for such prescient advice. His reply is unprintable. But I know he didn’t mean it.  

posted on 01 February 2013 18:34 byPJS