Artful Investing

Investing isn't an exact science. It's probably not a science at all, which might explain why Einstein sought the secrets of the universe rather than Wall Street and Newton lost a load in the South Sea bubble.

Equity investment better resembles a particularly tricky art, it is possible to consistently profit but there is no formula or algorithm for guaranteed success.

Against the legions of possible investments we need a set of rules that encapsulate the logic of value and risk to enable rejection and selection. It would be a fruitless and expensive mission to seek out cast-iron rules for investment, more useful (and hopefully profitable) would be a collection of rules of thumb, which the Collins dictionary describes as:

broadly accurate guides or principles based on experience or practice rather than theory

It's my belief that rules of thumb are more useful to the investor than much investment theory such as the dividend discount model or modern portfolio theory. Rule of thumb occupies a dominant role in a broad spectrum of activities including tea making (one bag per cup and one for the pot), gardening (plant bulbs at one thumb's depth) and more sophisticated activities such as chess or advertising.

But when it comes to stocks and shares a few of my favourite guidelines are:

• Don't invest in loss-making companies
  If they have never turned a profit previously, will they ever?


• Avoid high debt situations
  A company that can't control debt is especially vulnerable to interest rates and force majeure events, debt servicing constrains future growth.


• Don't take on currency risk
  Operating in some parts of the world magnifies risk. Volatile currency speculation is for clairvoyants.


• Profit making companies should not trade at a discount to net asset value
  You know it makes sense.


• Don't diversify for diversification's sake
  Only buy companies you are confident in.


• High dividend yields won't last for long
  Either the price will rise or the dividend will fall - keep an eye on profits and debt.


• Eschew celebrity management
  A good company needs no talking-up.


• The house broker is biased
  The company is one of their customers, you know.


• A crazy share price can still double
  It can be expensive trying to decry mania.


• Steer clear of companies reliant on government suport
  Policy can change faster than a Virgin Pendolino - see Railtrack

I hope these tenets will provide some salvation from the myriad pitfalls of stock-market investing and put more meat on the skeleton of my investment framework. Stronger still than rules are axioms and there are plenty of those in Max Gunther's The Zurich Axioms. With Christmas approaching, I recommend this investment as a stocking filler.

The Artful Dodger