independent

Saturday 19 April 2014

New Year is a time to dust down your investment strategies

THE beginning of the year is traditionally the time to review diets, reassess exercise programmes, and generally make plans for the unattainable. It is also the time to revise investment strategies.

So it would be unfashionable if this column did not take the time to look at a few basics of investment so that it's clear the column is grounded by some rules. But then, rules are made to be broken.

It is most unlikely, for instance, that Real Madrid coach Jose Mourinho, would call in his squad at the beginning of the season and ask the players whether they would like to play four-four two or four-three-three? It's improbable that he would then do what they suggest, no matter how many trophies the players have on their mantelpieces. It would be even more unlikely that if the maestro found his side 2-0 down against Barcelona that he would not quickly drop-kick the rules into the Rio Manzanares. We promise to follow the lead of the master tactician and flexibility will be our golden rule.

Investment, not unlike football, is full of jargon and ways to confuse the unwary. However, it is important to understand principle one: try your almighty best not to lose money. And principle two: remember principle one.

Beware of people who snow you down with buzzwords unless you can really understand what they are telling you and who will also reveal how much of your money (or gains) they will pocket before you get your rewards. There are really good areas for investment these days, including in Ireland, whether you are aiming for capital gain (meaning the value of your investment will grow) or for income (meaning the dividend you get on your shares is a chunky one and is secure.

Under all of these headings there are inflation-beating shares, defensive shares and the so-called momentum shares. There are also shares that are associated with merger and acquisition activity.

For investors who depend on their holdings for an income, there are possibilities they should avoid like the plague. These come into the high-risk category, where the rewards are great but the downside is enormous. Moreover, big risks should never ever, ever be explored with borrowed money.

There are also ethical shares, which have no exposure to investments in 'sin shares' like tobacco (BAT), alcohol ( Diageo), gambling ( Paddy Power) and nuclear power (Eon). There are also shares considered to be out-of-bounds because of political connotations.

When it gets down to this nitty-gritty level, there will be a million reasons for buying or selling shares. Personally, I would run a mile from applying any political motive to buying or selling. I do, however, have a rule of thumb. I like my examination of companies and their shares to be 'bottom-up' rather than 'top-down.' The 'top-down' punters look at the world and apply a big broad macro view, taking in interest rate trends, currency variables and emerging markets. My 'bottom-up' stance is to examine specific shares like Stobart, Aviva and Estee Lauder, seeking out their competitive advantages.

The strategy of buying stocks for their long-term value has its attractions, and the secret for this type of share-buying is to be able to spot the high-flyers that will still be doing the business in five years' time. I have to admit that I've had many shares that I assumed were high-flyers, only to find they were low-flyers that caught an occasional gust of wind eg. Bank of America (see graph).

So, spotting high-flyers is challenging. I would be happier looking for value by spotting stocks that are low-rated but have a decent balance sheet, with cash or low borrowings. Is this rocket science? No, not since Benjamin Graham published his book 'Intelligent Investor' in 1949.

To summarise, I like cautious capital growth, with a decent dividend. I'll be examining shares that fall into this category in the coming months.

Dr John Lynch is a former chairman of CIE. Nothing published in this section is to be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent

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