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Structure of the book

In this book I reveal those secrets and the thrills and pains I experienced in finding them. Many of these ideas and philosophies are now being adopted by successful hedge funds. They are presented as 100 different Strategies spread evenly over ten chapters.

Chapter 1 – Markets

My first trading experience resulted in a big loss. I was lucky! I quickly learnt how tough it can be. The most common mistake is to assume that investment success is easy. This is encouraged by so-called ‘expert’ views appearing in the media which imply that market prices are somehow flawed and that there are plenty of opportunities.

The irony is that in thinking it’s too easy, investors make it more difficult! It leads them away from the truth. The starting point must be that market prices are normally about right, and that any opportunities can only be found by identifying their cause and understanding how they work. We need to be careful — experts are vastly overrated. Most professionals in the markets are not actually outguessing the price, but are making money from clients, transactions and commissions.

The markets are increasingly challenging. Many opportunities that investors pursued years ago have simply disappeared. Speculation increasingly requires that the fundamentals are fully supportive. Even governments find it hard to push prices to the wrong levels.

Fortunately I have found one shortcut in the investment world which works very well: the approach in these Strategies can be used for many different markets. I have used the same methods successfully over twenty years with currencies, bonds, property, stocks and private companies. It has enabled me to pursue investment opportunities wherever they may be found.

Chapter 2 – Comparative Advantages

An investor needs to spot genuine opportunities in order to make good consistent returns. A few market professionals can rely on the advantages of superior information, high quality analysis or client orders to help them predict future price moves, but for various reasons these advantages are dwindling, and anyway the ordinary investor needs something more accessible. Fortunately there are opportunities offered by market behaviour which are long lasting and can be spotted without enormous research or inside information:

 There remain patterns and anomalies in the markets.

 Markets are slow to react to big picture changes.

 Small companies offer more opportunities.

 Markets go further than generally expected.

 Markets move in underlying trends.

 A view on the fundamentals can be combined with price movements to manage trading positions.

When these are pursued with sensible risk management the results can be stunning.

Chapter 3 – Risk

Over a period of time, even the best investors will inevitably suffer losses. Unfortunately even good ideas can lose money just as bad ideas can sometimes make money. There is inevitably a high degree of chance or luck involved. The most important thing is to manage the risks and to ‘stay in the game’. Investors need to think about how far a price can move in the wrong direction. They also need to diversify, be able to cut losing positions and withstand the stress involved.

Chapter 4 – Patterns and Anomalies

I have spent my professional life looking for patterns and anomalies. There are many in the markets which are useful to understand. Shares, bonds, currencies and property all offer unique challenges and opportunities.

A good idea can often point to more than one type of investment. One example is that a strong economy is bullish for both stocks and property, but property may be the easier play because it has smoother cycles.

Another pattern in the markets is that crisis situations almost always provide opportunities to those investors who can remain calm and who have kept some powder dry.

Chapter 5 – Big Ideas

Big ideas can make big money. There is a host of examples: the big falls in inflation, technological innovation, emerging economies and China’s appetite for raw materials are just a few. The big ideas cause big but slow changes in many markets. Seldom are these expected by economists and analysts who often struggle to see the wood for the trees.

Investors should look for these big ideas and ignore anything which is too obscure. With those small things it is normally too difficult to out-analyse the analysts.

For investors in mainstream markets, the big idea they are pursuing is often the state of the economy. It’s too hard, for example, to make money on the broad stock market when the economy is going into a recession, so at that time bonds are a better bet. A useful way for those investors to keep an eye on the economy is by a simple checklist of the positives and negatives.

Chapter 6 – Small Companies

I am convinced that small companies offer more opportunities than larger companies. There is a greater chance that they are mis-priced in the market because there is a big variation in their quality, they are often involved with new products and they are not as widely followed by analysts and investors.

For a small company, the competence of the management is the most important feature. Other things investors need to look at are, of course, the company’s products and markets and its ability to handle growth.

Chapter 7 – Price Behaviour

Time and time again I have watched market prices go a long way and surprise just about everybody involved. In recent years, there have been moves, like the rise and fall in the NASDAQ, the rise in the oil price, the rise in house prices and the weakness of the US dollar. These market moves are opportunities, because in each case the market takes its time to react to big ideas and big changes. All the way along, people are sceptical and they don’t expect the price move to continue, so investors need to expect the unexpected. They shouldn’t cut winning positions too early, and they should accept that the old price levels are history.

Chapter 8 – The Understanding and Use of Trends in Prices

I am able to show that trends have operated across nearly all markets for a long, long time. These price trends are a gift! A market that has moved higher is more likely to continue moving higher than to suddenly reverse. The equivalent applies for a falling market. Although trends are well known in the markets, their implications are ignored (even denied!) by mainstream thinking. For example, despite the common belief, markets tend to under-react, not overreact. Trends can be used to make money; for years I have experienced a lot of success using simple systems which use nothing but trends, and trends can help decide the best way to time investments.

There are solid reasons why trends exist and will persist in the future. Market information spreads gradually, and the reaction is delayed by inertia and scepticism. Rising prices can actually lead to more, rather than less, buying in the market. Economic cycles also help prices move in trends.

Chapter 9 – Market Timing

Even the best investment ideas can come unstuck due to bad decisions on when to buy and sell. The best technique for entering the market is to wait for a price trend to verify a bullish or bearish view. So it is not a good idea – unless there is market panic – to buy into falling markets. Being a contrarian means fighting against trends and not acknowledging that markets can go further than expected. It may work occasionally, but it is against the odds. Similarly, add to winning trades, not losing trades, and don’t be scared if you are investing alongside the consensus view. For a price to go a long way it will require consensus agreement at some point.

The decision to exit should only be made when the reasons for the investment are no longer sound, or when the price trend has reversed. Sticking with winning trades for as long as possible is the only way to make big wins.

Chapter 10 – Avoiding Temptation

I believe that really good investors can avoid temptation. They have the discipline to know when there are no genuine opportunities and not to take excessive risks. In these situations, it may be useful to keep an eye on a variety of markets and to see if any price trends develop. These may signal when something is happening which is worth investigating.

Be careful in these quiet times, because even simple wealth preservation is not straight forward due to taxes and inflation. Sophisticated retail products may appear good on the surface but require close scrutiny. With a passive portfolio, management and brokerage fees should be kept to a minimum.