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Douglas Chadwick, Saltydoginvestor

 

The financial world would have you believe that successfully controlling and running your own investments requires the expertise of Warren Buffet, the cunning of Nick Leeson and a tall skyscraper in the City of London.

Well, in my view that is simply not true! A lot of the personal finance industry is not set up help you to become a DIY investor because their business models are based around ‘advising’ you.

This means that your returns have been reduced in order for this to happen. For me it has always been about answering a simple question.

 

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Will I or an outsider have the most interest in securing a well-financed retirement and an inheritance for my descendents? There are no points for answering this. At the end of the day, your savings and investments are your baby and nobody else`s.

‘ I used to have an initial investment target of producing an income that was greater than my wife and two daughters could spend. I have now lifted this target to include a further contribution towards the country`s economy. In this environment your money simply has to work hard and that means it must be advantageously invested’

In Europe we live in a socially funded world, which means that government cannot give to anybody, anything that it does not first take from someone else. Redistribution means that as a saver and a person of means, whether you like it or not, they are going to be coming to you.

Today, we do not know what future tax demands we are going to have to meet, just that they arealways going to be around the corner. I used to have an initial investment target of producing an income that was greater than my wife and two daughters could spend. I have now lifted this target to include a further contribution towards the country`s economy. In this environment your money simply has to work hard and that means it must be advantageously invested.

 

Types of Investing

 

There are many different types of investing styles all of which have their advocates and enthusiasts. For me there are only three that merit attention.

There is ‘value investing’, there is ‘small company investing’ and finally there is ‘momentum investing’ using funds.

At Saltydog Investor we believe in momentum investing – with the proviso that you must have access to up-to-date, unbiased performance fund numbers. It makes long term sense and lends itself easily to the DIY investor.

Value investing is represented very clearly and ably by its most famous advocate Warren Buffet, one of the wealthiest men in the world. It means that you are looking for good companies that are perhaps trading in unloved sectors or those which are just simply overlooked and undervalued.

You buy their shares cheaply and sell a long time in the future at a very much higher price. At least that is what you hope. There are many fund managers who specialise in this approach. To be successful, it requires scrutinisation of the company`s balance sheet, sales plans and accounts. Even so, having done all of this, due to unforeseen circumstances, it can all still go horribly wrong.

If you are going down the route of value investing I think it is worth remembering the expression ‘Man plans and God laughs’. Warren Buffet`s big recent failure was buying into Tesco and a couple of years later being forced to write off nearly a billion pounds. Small company investing is exactly what it says on the tin.

There are many funds that carry the title of “small company” and you should look at the I.A. definitions that put restrictions on where these fund managers can and cannot invest. The theory is that companies start small and gain value as they grow. That is fine and dandy provided that you have selected the ones that stay the course and do not fall by the wayside.

 

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There is also another reason why this style is popular with some managers and that is because when a company is small it is usually less well researched.

This means that price anomalies may exist and there is a bargain to be bought by the fund manager or person that does this research. So at the end of the day, it turns out that this is really just another form of value investing that is restricted to small companies as opposed to large.

 

Momentum Investing

 

Momentum investing via funds has much more logic to its approach and in my book makes far more sense. By using funds, you spread your risk away from individual companies and you also avail yourself of the knowledge of the various fund managers and their research teams.

A scientific definition of momentum might be ‘The force possessed by matter that is in motion’. The product of the mass and velocity of a body gives it impetus and so it is with investing.

The greater the money that is being invested into a sector the quicker its value will rise and it will acquire greater and greater impetus as it attracts more and more investors. For a time its rise will become self-fulfilling. Obviously the opposite also applies.

The idea is that once a trend is established either upwards or downwards for a fund or sector, then it is more likely to continue in that direction than to move against the trend. Put simply, momentum investing can be likened to a relay race. When a sector is doing well, then you choose a performing fund from that sector to carry the baton, and when that sector runs out of puff, then you hand it on to the next fund, in the next sector that is pulling ahead and gaining momentum.

‘momentum investing can be likened to a relay race. When a sector is doing well, then you choose a performing fund from that sector to carry the baton, and when that sector runs out of puff, then you hand it on to the next fund’

You are in fact making use of the knowledge of the fund managers and their analysts when they are right and moving on to another team of winners as your current ones start to falter. You all know from your childhood that it is better to be on the ladder and off the snake.

The trick is to see the trends and to move your money into those funds on the up and out of those on the down – without overtrading or fussing too much about getting the top or the bottom of the movement. The advent of fund supermarket platforms not only allow you to track down the best performing funds and sectors in order to make your trading decisions; but also they allow you to make your trades at virtually no cost.

It really can be a win-win situation provided you have access to and are using current, accurate information.

In summary; value investors will try to buy low and anticipate selling high. The momentum investor will buy high and sell higher whilst ‘riding the herd’. Personally I would rather be buying something that is working today rather than hope that it will work tomorrow.

I am certain that if you are able to work out the charges on your telephone bill, then you can succeed as a momentum investor

 

 

 

Saltydog Investor is the UK`s first fund performance data monthly subscription
newsletter which provides a weekly electronic fund performance data feed, aimed at the D.I.Y. investor. It provides listings of the top ten percentage of performing funds, sorted by sector and volatility, in an easy to understand, accessible format. Saltydog Investor is designed to encourage and enable lay investors to manage their own investments. www.saltydoginvestor.com

 

 





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