beating the markets...?

Smart Investor: Can we beat the market? Yes we can
by Smart Investor on Aug 15, 2011 at 00:01
http://www.citywire.co.uk/money/smart-investor-can-we-beat-the-market-yes-we-can/a515490/full


Matching the performance of a professional investor need not be time consuming, all it requires is a basic understanding of the market and belief in your own abilities.

Various TV programmes have sprung up in recent years that try to take a person who is a complete beginner at a particular activity and turn them into a professional. Channel 4 show Faking It, for example, would take someone who had never sung a note, train them up and have them perform alongside professional vocalists in front of a panel of ?experts? whose job it would be to try and identify which of the performers was ?faking it?.

Could the same approach be applied to becoming a successful investor? Can any private individual, anywhere, outperform financial professionals? Even if they have no technical knowledge, no past experience and the mere thought of investing their own capital leaves them trembling with fear?

Making time
Of course they can. The first hurdle to success, however, is to understand the scale of the task at hand.

Many would-be investors I speak to fear they just wouldn?t have the time. Investing requires the checking of various figures and consideration of how best to apportion capital. But while some time is required, the amount needed is unlikely to be greater than that for a hobby pursued by someone in a full-time job.

If time really is in short supply, then it is probably best to stick to tracker funds and focus on asset allocation, which is of vital importance and a topic this column has discussed in previous articles and will continue to focus on. Just by spending time on asset allocation you can still perform exceptionally well.

Allocating assets
I hope, however, that you do have time to conduct some simple research and for this you will need to understand some basic terms, which are both straightforward to understand and highly useful.

The first area to focus on is asset allocation, which should consist of three assets: shares, government bonds and cash. Previous articles have been dedicated to each one of these and may be worth casting your eye over in order to go ?back to basics?.

Of course, the main driver behind successful investing lies in the allocation of capital between the three asset classes. Benjamin Graham, the founding father of value investing, recommended using the 75/25 rule and a previous article has focused on this particular philosophy.

The crux of the idea is to always keep 25% of your capital in both government bonds and in shares, with the remaining 50% moving between the two depending on the interest rate and economic cycles.

This may at first sound complicated, but if you follow a handful of simple rules then it will be easier than you think.

Filtering investments
Central to this concept is ratio analysis and the adoption of a ?filter system? to decide which shares to invest in. By using a filter system you will be able to find the companies which are performing well, offer good value for money and that are financially sound.

Of course, it is reasonably straightforward to judge whether a company is financially sound and performing well or not through using a filter system. However, when it comes to value for money, I must admit it can be a little subjective and is not an exact science.

The key ideas to remember are that the same valuation method must be used for all companies. I have known many professionals chop and change their methods for different sectors and even companies within sectors. Not only is this illogical, it is usually unsuccessful. Furthermore, you should be very aware of Mr Market ? a character invented by Benjamin Graham. In essence, Mr Market is the stock market and he is often wrong.