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First published in Great Britain in 2005 by Harriman House Ltd.

This eBook edition 2013

Copyright © Richard Farleigh

The right of Richard Farleigh to be identified as the author has been asserted

in accordance with the Copyright, Design and Patents Act 1988.

ISBN 978-0-85719-303-2

British Library Cataloguing in Publication Data

A CIP catalogue record for this book can be obtained from the British Library.

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher.

No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author.

For Camilla and the loves of our lives: “Toto”, “Baba” and “Loulou”.

With thanks to Janine Perrett, Peter Farleigh, Ross Thompson, Roy Travers, Robert Olson and of course, Marjorie Farleigh.

1 – Markets

1.0 The different markets have many useful similarities

1.1 Fear the market

1.2 Markets are more efficient than generally acknowledged

1.3 Market opportunities are disappearing

1.4 The markets can overwhelm government intervention

1.5 The market is strengthened by speculation

1.6 Respect the market not the experts

1.7 Most professionals are not outguessing the market

1.8 Listen and read very critically

1.9 Understand recent history

2 – Comparative Advantages

2.0 To outperform the market you need a comparative advantage

2.1 Everybody is a hero in a bull market!

2.2 Never stray from your comparative advantages

2.3 A small percentage advantage is enough to outperform the market

2.4 Test the advantage over time and make changes slowly

2.5 Financial markets advantage #1: Information

2.6 Financial markets advantage #2: Original analysis

2.7 Financial markets advantage #3: Brokers and bankers have extra information and free insurance

2.8 Financial markets advantage #4: Understanding market behaviour

2.9 The Strategies are based on six types of market behaviour

3 – Risk

3.0 Manage and embrace risk

3.1 Good ideas can lose money

3.2 Asymmetry has fooled a lot of investors

3.3 Wild swings and losses are uncomfortable but they may offer the best rewards

3.4 Diversify

3.5 Assess risk - and then double it

3.6 Risk adjust results after the trade

3.7 Qualities of the successful trader

3.8 Trading pressure increases with amount at risk

3.9 The trader's dilemma - the stop loss?

4 – Patterns and Anomalies

4.0 Look for patterns and anomalies

4.1 Choose the right markets

4.2 The share market dilemma

4.3 Crisis situations almost always provide an opportunity

4.4 Short term interest rates will tend toward the inflation rate plus the economic growth rate

4.5 Government bond markets for the major economies are not prone to crashes

4.6 Currencies: two economies and fact or fashion?

4.7 Some markets are driven by supply

4.8 Property prices often lag stock prices

4.9 Charts are the astrologers of the markets

5 – Big Ideas

5.0 Markets are slow to react to structural influences

5.1 Look for the next big thing

5.2 Ignore obscure theories and observations

5.3 Only invest in the broad markets when they are in line with the prevailing economic environment

5.4 Be methodical - use a checklist to quantify and add rigour to a view

5.5 Buy stocks when economic growth is strong and inflation is weak

5.6 Buy bonds when inflation and economic growth are both weak

5.7 Buy commodities when inflation and economic growth are both strong

5.8 Few assets benefit when inflation is strong and economic growth is weak

5.9 You are unlikely to out-analyse the analysts

6 – Small Companies

6.0 Small companies offer more opportunities than large companies

6.1 The quality of a company's management is by far the most crucial factor in determining its success

6.2 Determining the fair valuation is more difficult with small companies

6.3 Clearly identify the comparative advantages

6.4 Be sure the business is sustainable

6.5 Good products don't always sell

6.6 Growth puts strains on small companies

6.7 Be sure of a route to exit and adequate cash resources

6.8 Shareholders can help unlisted companies

6.9 Be pragmatic with due diligence

7 – Price Behaviour

7.0 Prices go further than expected

7.1 Forget the old price

7.2 People often misjudge probability and logic

7.3 A price is an average of possibilities

7.4 The probability can be asymmetric

7.5 Be nervous when a market doesn't rally on good news

7.6 Don't day trade!

7.7 Avoid trading in options if you do not understand their pricing

7.8 Back your hunches with at least a small investment

7.9 Features of good trading models

8 – The Understanding and Use of Trends in Prices

8.0 There is statistical proof that market prices trend

8.1 Trends operate across commodities, currencies, interest rates, stocks and property

8.2 Trends have been in operation for a long time

8.3 It is not true that markets usually overreact

8.4 Trends are resistant despite being well-known

8.5 Trends represent the gradual dispersal of information

8.6 Price reaction is delayed by inertia and scepticism

8.7 A rising prices attracts buyers

8.8 Economic cycles breed market cycles

8.9 News against the trend is often ignored

9 – Market Timing

9.0 Combine fundamentals with price action

9.1 Ignore the noise in price movements

9.2 Don't be a hero - do not buy falling markets

9.3 Trade with the trend - wait for the trend before you enter the market

9.4 Add to winning trades, not losing trades

9.5 It is safe to be with the consensus

9.6 Do not use price targets or time limits

9.7 If the fundamentals have changed adjust the position accordingly

9.8 You will not get the high or the low

9.9 A powerful model shows probability is on your side

10 – Avoiding Temptation

10.0 Know when to stay out of the market

10.1 Identify what is difficult about the existing environment; it may change

10.2 Monitoring trends may alert you to opportunities you wouldn't normally find

10.3 With success, bank some profits

10.4 Negotiation is an art

10.5 The evolution of the con artist

10.6 Wealth preservation is not simple

10.7 Be sceptical of sophisticated retail products

10.8 Management and brokerage fees should be minimal in a passive portfolio

10.9 Follow these strategies and be part of the hedge fund (r)evolution

Richard and Camilla