Wednesday, 29 February 2012

The latest edition of Buffett's annual letter,

The per-share book value of both our Class A and Class B stock increased by 4.6% in 2011. Over the last 47 years (that is, since present management took over), book value has grown from $19 to $99,860, a rate of 19.8% compounded annually.

Change in Per-Share Book Value of Berkshire
Compounded Annual Gain – 1965-2011 . . . . . . . . . . . . . . . . . . . . . . . . . 19.8%
Overall Gain – 1964-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 513,055%

Percentage Change in S&P 500 with Dividends Included
Compounded Annual Gain – 1965-2011 . . . . . . . . . . . . . . . . . . . . . . . . . 9.2%
Overall Gain – 1964-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,397%

Berkshire Hathaway showed losses in only 2 years for this long period, namely 2001 (-6.2%) and 2008 (-9.6%).

By ensuring that losses are few and small, the gains in all the years compounded into a very huge value.

Why Don't You Invest?

Last month, The Motley Fool posted a beautiful video titled "Why Do You Invest?"
"Is it for the fancy cars? The dream home?" the ad asks. "Maybe we invest for our families," it ponders, a reason I think most investors would agree with.
But there's a related question for millions across the country: Why don't you invest?
About 54% of U.S. households own stock investments, according to a 2011 Gallup poll. That leaves 46% that do not.
Part of this is due to a lack of wealth -- many American households simply don't have any money to invest. But there's more to it. A 2008 paper by a trio of economists showed that (link opens PDF file) sizable numbers of even the wealthiest Americans don't own stocks. 
  • Of households ranked in the third quartile of wealth, 34% did not own stocks either directly or through mutual funds. 
  • Of those in the top quartile, 14% had no stock exposure. 
  • Within the richest 5% of American households, 6% owned no stocks.

Some of the wealthiest households may avoid stocks because ownership in private businesses offers better opportunities. But for others, the excuses are more interesting.
Two centuries of data makes one point clear: Over the long haul, stocks trounce the returns of bonds, cash, commodities, and real estate -- and they do it with less risk. 
  • Adjusted for inflation, $1 invested in stocks in 1802 was worth $755,000 in 2006. 
  • In bonds, $1 turned into $1,083. 
  • Gold grew to $1.95. 
  • Cash depreciated to $0.06
During that 200-year stretch, the worst 20-year period 
  • for stocks produced a real return of 1% a year. 
  • For bonds, the worst period eroded half of investors' purchasing power. 
Stocks win over the long haul, and yet a large number of Americans avoid them.
Why is hard to know, but not particularly surprising. Americans' love for self-destructive financial behavior is never-ending. One incredible 2005 report (link opens PDF file) led by Yale economist James Choi showed that 
  • half of workers over 59.5 years old -- and hence eligible to withdraw money from a 401(k) plan right away -- do not contribute enough to retirement plans to take full advantage of employer matching, turning down money that would have been theirs to spend immediately. 
  • Two-thirds of those over 59.5 years old not participating in a retirement plan with employer matching said they would never sign up. It's astounding, as they could have pulled the money out the next day penalty-free.

Choi's paper doesn't detail attitudes toward stocks, but his results speak volumes about people's attitudes toward money in general. When something requires a modicum of effort, many Americans decline -- even if it offers substantial rewards. Our aversion to paperwork can be stronger than our desire for money.
Past performance also guides people's willingness to own stocks. 
  • While 54% of households currently own stocks, 
  • that figure was as high as 65% in 2007 when the market hit an all-time high. 
As USA Today wrote in 2005:
In 1996 and 1997, when the bull market was in full swing, Washington [state] gave its teachers an option of staying in the traditional pension plan or switching to a hybrid pension plan -- 50% of assets in a traditional pension and 50% in a private account. Seventy-four percent opted for the hybrid plan. But when public employees were offered the same choice in 2002 and 2003, after the slump, only 11% chose the hybrid offering.
Those who do invest in stocks tend to do miserably at it, reinforcing their perception that it's a losing game. 
  • One study by Dalbar showed that (link opens PDF file) the S&P 500 returned 9.14% a year over a 20-year period ending 2010, but the average investor earned 3.83% a year by buying high and selling low. 
  • Stocks crush bonds over the long run, but many would be better off in bonds so long as they stay put. They're that bad at investing.

Then there's the fear of being cheated. The same three economists mentioned above wrote a great paper (link opens PDF file) in 2008 asking a group in the Netherlands a simple question: "Generally speaking, would you say that most people can be trusted or that you have to be very careful in dealing with people?"
The question has nothing to do with stocks, but it was highly significant in predicting stock ownership. 
  • "Trusting others increases the probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4% points," the authors wrote. 
  • The results "explain the significant fraction of wealthy people who do not invest in stocks." The study is likely applicable to the United States.

Another possibility -- though one I don't have evidence for -- is that people willingly forego higher long-term returns to avoid the nausea of stock volatility. 
  • Academic economists tend to view people as unemotional "utility maximizers" for whom rational behavior equals whatever is most efficient, but the real world is different. 
  • Trading a percentage point of returns for a better night's sleep may be worth it for those who value a peaceful life over a large net worth
  • What looks irrational on the chalkboard often makes sense in the real world.

With pensions a dying relic, more Americans are now responsible for financing their own retirements. For most, the only way to get there is heavy exposure to stocks over many years. Will those now shunning stocks eventually change their minds? Will they ever get to retire? It's hard to know. Never underestimate people's willingness to undermine their future.

Financial Planning - Purpose, Benefits and Components

The purpose of financial planning is to help individuals and families achieve their life goals through proper management of their finances. This process allows them to see where they stand financially and determine what steps they must take to reach their objectives.

Financial planning provides direction to financial decisions and gives insight on how each decision affects other financial areas of life. Viewing each financial decision as a whole allows one to consider its effects on short- and long-term goals.

The components of financial planning include, but are not limited to, the following subject fields:
  1. Financial statement preparation and analysis 
  2. Investment planning 
  3. Income tax planning
  4. Education planning
  5. Insurance planning and risk management
  6. Retirement planning
  7. Estate planning

Read more:

Visit this site 64 sections of good notes on financial planning.

Is A Career In Financial Planning In Your Future?

The job goes by a lot of names, including financial planner, financial advisor and personal financial consultant, but it's rarely called what it typically is: financial products sales. Financial planners earn a living by helping people sort through and choose investments, insurance and other financial products. They do retirement planning, college funding, estate planning and general investment analysis. (To learn more, see What Is A Registered Investment Advisor?)

Obtaining New Business
Finding clients who need those services and building a customer base is crucial to experiencing success as a financial planner, because referrals from satisfied clients are an important source of new business. Whether you find new clients by giving seminars or lectures, through social or business contacts or simply by cold calling, find them you must.

Having a broad social network is one reason that many successful financial planners enter the field after working in a related occupation such as accountant, auditor, insurance sales agent, lawyer or securities, commodities and financial services sales agent. (For more insight, read Financial Advisors: How To Target Ideal Customers, Cold Call Without Getting The Cold Shoulder and Alternatives To The Cold Call.)

What Education Will Lead to Employment?
Financial planning employers look for candidates with a bachelor's degree in accounting, finance, economics, business, mathematics or law. Courses in investments, taxes, estate planning and risk management are also helpful. Programs in financial planning are becoming more widely available in colleges and universities.

Financial analysts may also seek the Certified Financial Planner® (CFP®), the Chartered Financial Analyst (CFA) and the Chartered Financial Consultant (ChFC) designations. To read more, see Studying For The CFP Exam.

Generally, a license is not required to work as a personal financial advisor, but advisors who sell stocks, bonds, mutual funds or insurance may need licenses such as the Series 6, 7, or 63. These exams are administered by the Financial Industry Regulatory Authority (FINRA, formerly the NASD) and in order to take most of these exams, sponsorship by a member firm or self-regulatory organization is required. (For more information, see Which popular professional certification exams do not require sponsorship?)

Where do Advisors Work?
More than half of all financial advisors work for finance and insurance companies, including securities and commodity brokers, banks, insurance carriers and financial investment firms. However, four out of 10 personal financial advisors are self-employed, operating small investment advisory firms, usually in urban areas.

According to the Bureau of Labor Statistics, the overall employment of financial analysts and personal financial advisors is expected to increase faster than the average (by 27% or more) for all occupations through 2014. This is a result of the increased investment by businesses and individuals, the rising number of self-directed retirement plans and the growing number of seniors. Personal financial advisors will benefit even more than financial analysts as baby boomers save for retirement and as a better-educated and wealthier population requires investment advice. In addition, people are living longer and must plan to finance more years of retirement.

Is Financial Planning the Right Career for You?
Take this quiz to help you find out:

Quiz: Is Financial Planning Right For You?

1. How comfortable are you with making sales?
A. I could sell my grandmother a ticket to a SuperNova concert with no guarantee that she'll enjoy the performance.
B. I could sell my grandmother that SuperNova ticket, but I would feel guilty if she didn't like the show.
C. Only a bad person would sell his or her grandmother a SuperNova ticket.

2. At what stage of life are you?
A. I just graduated from college.
B. I've been out of school for a few years.
C. I've been in my line of work for several years, but I'm ready for a change.

3. How much of an extrovert are you?
A. I have been the president of nearly every club I have ever joined.
B. I have enough friends to make me happy.
C. A good book, a room to myself and no interruptions is my idea of heaven.

4. You could be described as:
A. both analytical and a good communicator.
B. analytical, but not a good communicator, or a good communicator, but not analytical.
C. neither analytical, nor a good communicator.

5. At work, I prefer to do my job:
A. completely independently
B. somewhat independently.
C. as part of a team.

6. What appeals most to me about becoming a planner is:
A. the challenge of building a client base.
B. the creation of my own business.
C. the analysis of investments.

7. According to the Bureau of Labor Statistics, the median annual income for financial planners was $64,750 in 2010 - this includes commission income. How do you feel about that?
A. I've never been average and I'll earn more than the median.
B. That would work for me.
C. Working for commissions only makes me nervous.

If you answered mostly As, then financial planning could be the right career for you. You're energized, not terrified, by the idea of earning a substantial amount of your compensation through commissions. If you have the right connections and the energy level to work that network, you could succeed in this tough career.

If you answered mostly Bs, then you need a back-up plan. Financial planning might work, but you're likely to end up among the 80% of planners who, according to William F. Cole's "The Complete Financial Advisor," are in the business for less than five years. When sales don't work out, what will you do next and how will you sell yourself to your next employer?

If you answered mostly Cs, don't even think about financial planning. If you love the portfolio analysis side, consider working as a financial analyst. If math is your strong subject, go into financial engineering or quantitative analysis. You'll make more money without having to sell all day long. (For further reading, see Becoming A Financial Analyst.)

Read more:

Dow Closes Above 13,000; First Time Since 2008

The index, which tracks 30 of the biggest companies on Wall Street, last surpassed the milestone mark in a closing on May 19, 2008, when it ended trading at 13,028.16.

February has been a good month for the Dow Jones industrial average as it trades at levels not seen since the 2008-9 financial crisis. And after several narrow misses, it mustered enough momentum to pull itself firmly across the 13,000 threshold on Tuesday and stay there through the close.
As it did twice last week and on Monday, the Dow poked through the 13,000 level in intraday trading on Tuesday but then dropped back down toward the end of the day before a final surge that pushed it up to about 13,005.
It was a day marked by a handful of economic reports that were generally positive. The Conference Board’s measure of consumer confidence registered a 12-month high of 70.8 this month, a reflection presumably of continued improvement in labor market conditions, economists from Capital Economics said in a research note. Home prices, however, have fallen, with the 20-city Standard & Poor’s/Case-Shiller index declining 4 percent in December year-over-year. Durable goods orders fell 4 percent in January, but aircraft orders accounted for much of the drag.
The Dow is up nearly 3 percent for the month. Analysts said that the gains reflected the culmination of a generally upward trend in stocks since the beginning of the year. But they were also quick to point out that it said more about improving sentiment in the financial markets and the performance of individual companies than about a rebound in the economy since the recession ended in mid-2009.
“Thirteen thousand is not so very important technically as it is emotionally, simply because it is not 12,000,” Dan McMahon, the head of equity trading at Raymond James & Associates, said earlier Tuesday. “It is on the way to 14,000. It is kind of a landmark on the way.”
“The market has rallied significantly since the October lows and everything seems to be trending in the right direction,” Mr. McMahon added. “We are waiting for the next catalyst.”
Mr. McMahon said a better barometer for the market in general was the Standard & Poor’s 500-stock index, which measures the broader market, and has already hit its own precrisis levels. It closed Friday at its highest level since June 2008. Other broader measures of the market, such as the Russell 50, which includes the largest capitalization stocks, have already recovered as well.
“The stock market has been going up pretty consistently since October,” Dan Greenhaus, the chief global strategist at BTIG.
The Dow hit a 52-week low of 10,655.30 on Oct. 3. All 30 companies have risen since then, but about a third are responsible for most of the gains in the index, based on how they are weighted. The top contributor was Caterpillar, a stock that reflects the ups and downs in the economy, particularly in construction. It has accounted for more than 343 points in the index rise since the October trough. IBM and Exxon, helped by a rise in oil prices, each also accounted for more than 100 points, as did McDonald’s.
“It takes just a couple names to get it going in one direction or the other,” said Owen Fitzpatrick, head of U.S. equity strategy for DWS. Mr. Fitzpatrick said, in general, some of the issues that propelled the sell-off of last summer have eased, such as the concerns that the United States would follow Europe into a recession.
Future catalysts include strong gross domestic product data, or other signs the economy is stable, Mr. McMahon said.
Mr. Greenhaus said the closing threshold for the Dow “technically means nothing” when seen in the context of the wider, uneven economic recovery.
“People who hung in there have now seen their investment return to pre-crisis levels,” he said in a recent interview. But he added: “People are still going to say ‘I still don’t have a job.’”
Since the financial crisis companies have achieved good results with cost-cutting and hoarding cash. Some, like McDonald’s, have reoriented their approach to the tighter economy.
McDonald’s, one of the Top 10 contributors to the Dow’s strong rise since October, is now up more than 60 percent since before the financial crisis. Sara Senatore, a senior research analyst at Sanford C. Bernstein & Co., Inc. said many fast-food and casual restaurants have done well during the economic downturn, but McDonald’s also has a global footprint with growth in other economies that has helped it to do well. In addition, it has done an “excellent job” innovating and re-imaging, with new beverages and Wi-Fi in some outlets that allowed it to persist when the economy improved.
“You could make the case people traded down during the recession and haven’t traded back out, or up, as much as you might have thought,” she said

Investing: how small UK companies can boost your wealth

Paul Marriage, manager of the Cazenove UK Smaller Companies Fund, tells Robert Miller why investors should ignore the 'noise' of macro economic news and look at smaller and profitable companies in the UK.

Britain becomes a nation of debt slaves as regulation and inflation deter saving

Britain becomes a nation of debt slaves as regulation and inflation deter saving

British piggy  bank
Britain's households are drowning in debt
Now that interest on debts absorbs nearly a quarter of British households’ net income, according to the Consumer Credit Counselling Service (CCCS), many families are discovering how cruel a taskmaster compound interest can be.
If you think conventional savings products – like pensions and managed funds – provide poor value, then just wait till you see how bad the ‘returns’ on borrowing are. While instant gratification has come to be regarded almost as a ‘yuman right’ in the credit-fuelled consumer societies of the developed world, the costs of that delusion will mount over the decades ahead. Worse still, the Government is actively encouraging young people to take on massive debts before they have any means of repaying them.
Even at today’s low rates of interest, debt that is allowed to accumulate on debt will often roll up faster than the debtor’s ability to repay it. For example, anyone who borrows £10,000 at a typical mortgage rate of 3.5 per cent will repay a total of very nearly £15,000 over the standard 25-year term.
Not many students today have heard of the ‘Rule of 72’ but more are likely to take an interest in future. This is the easy way of calculating how long it will take a debt to double; you just divide the annual rate of interest into 72 to arrive at the number of years. Albert Einstein is reported to have described compound interest as “the most powerful force in the universe” – and students in future could be forgiven feeling that questions about the accuracy of this quote are academic.
Sadly, savers have been so badly treated in Britain for so long that it is not hard to see why many have decided prudence is not worth the bother. Millions of people who set aside something for a rainy day in bank and building society deposits have seen the real value of their savings – their purchasing power – steadily shrunk by the Government’s undeclared policy of running negative real interest rates.
The average easy access savings account has lost nearly £2,500 of its real value or purchasing power during the last decade, according to calculations last year by Yorskhire Building Society. Inflation is the insidious enemy of savers because it stealthily reduces what their money will buy. But with the Government’s favoured yardstick, the Consumer Prices Index (CPI) and the Retail Prices Index (RPI) running in low single figures, many may underestimate the cumulative threat.
Simon Broadley of Yorkshire Building Society said: “With the average savings account standing at £11,648 this can have a significant effect on a person’s savings – especially over the long-term, given the current market.
No wonder Britain has turned from being a nation of savers to a nation of borowers. Regulatory requirements mean it takes hours to start a pension savings plan but just minutes to take out a credit card. After more than a quarter of a century of extensive and expensive regulation of financial services, the net effect has been to replace poor value retail savings products with even worse value retail credit.

What is the real cost of 0.5pc Bank Rate?

What is the real cost of 0.5pc Bank Rate?
Three years on, savers are paying a heavy price to subsidise cheap borrowing.

Lending to small businesses fell by 5.1pc in August, against an overall decline in corporate credit of 3.4pc Photo: Rex Features
Savers have lost more than £5,000 since the Bank of England reduced interest rates to a historic low of 0.5pc three years ago – but borrowers have cashed in.
While few savers will be celebrating the anniversary of this decision next week, mortgage borrowers will be toasting a windfall of almost £40,000, which is what the average householder has saved in interest charges over this period.
The unprecedented cut in interest rates was designed to protect an enfeebled economy from outright collapse, but the effect on families up and down the country has been enormous. Research for The Telegraph shows the extent to which families have gained or lost out. Pensioners are among those who have suffered the most; many depend on the income they receive from savings, so they have seen their standard of living fall – a decline made worse by high levels of inflation. Conversely, it is younger people, who typically have larger mortgages and other debts, that have benefited from lower borrowing costs.
Here we look in detail at how the Bank of England's extreme measures have affected our fortunes.


The Bank started seriously cutting interest rates in response to the growing credit crisis in December 2007. In the three years before this, the rate paid to savers with instant access accounts averaged 3.15pc, according to Defaqto, the data analyst. But over the past three years the average rate has been just 0.94pc.
As a result a saver with £20,000 in one of these accounts would have seen the interest they receive reduced by 70pc. In pounds and pence this means the interest has fallen from £1,950 to just £570 before tax – so they now get £1,380 less. For a basic-rate taxpayer, this means his income cut from £1,560 to £456, a fall of £1,104.
It's a similar story for cash Isas. The average rate on an instant access Isa in normal times was 4.85pc, Defaqto said, compared with only 1.52pc over the past three years. Assuming that savers had amassed £50,000 from successive years' Isa allowances, their income would have fallen from £7,635 to £2,315 – a fall of £5,320.
However, those who have shopped around and moved their savings regularly could have avoided much of this income loss. Over the past three years the average "best-buy" instant access account has paid 3.06pc, Defaqto found. As a result, anyone who switched from an average account to a best buy when the Bank cut rates to 0.5pc – switching again where necessary – would have seen their income fall by just £108 from £1,950 to £1,892 a year.
The average rate on a best-buy instant access Isa has been 3.12pc since March 2009. So a saver who took £50,000 out of an average product at that point and ensured it was always in a best-buy Isa thereafter would have seen their income fall by £2,805 from £7,635 to £4,830.
If you have left your savings in an account paying next to nothing, it's not too late to take action – in fact, economists don't expect Bank Rate to rise until late next year at the earliest. The best rate on the market for instant access accounts is currently 3.1pc on Santander's eSaver Issue 4, Defaqto said. Better rates are available if you tie up your money – such as 3.55pc for one year (from Aldermore), 3.85pc for two years (Vanquis Bank) and 4.2pc for four years (from BM Savings). Rates on equivalent Isas are often slightly lower.
David Black of Defaqto said: "There's a wide variation in the interest rates available even for the same sort of account – the rates paid by easy access accounts range from as little as 0.01pc up to 3.1pc. This shows how important it is to shop around for the best deal. If you've had an account for a while, the chances are you can get a better deal elsewhere."


Where savers have lost, mortgage borrowers gained. In the three years to December 2007 the average lifetime tracker mortgage charged Bank Rate plus 0.7pc, according to SPF Private Clients, the mortgage broker, so the rate that you actually paid at that time was 6.2pc. But since Bank Rate fell to 0.5pc the interest rate paid has been just 1.2pc.
As a result, monthly repayments on the average £250,000 lifetime tracker mortgage have fallen from £1,292 in the "normal" years to £250 now (on an interest-only basis). Total payments over three years have fallen from £46,512 to £9,000, saving the average borrower £37,512.
Two-year fixed-rate deals were also popular before the credit crisis. Someone who took out one of these loans two years before Bank Rate fell to 0.5pc would typically have paid an interest rate of 5.18pc, SPF said, taking a loan from Nationwide as an example. Monthly repayments at that rate would have been £1,079 (again interest-only).
After the introductory period on these mortgages has expired, the rate typically reverts to the lender's standard variable rate (SVR). A borrower who took out Nationwide's two-year fix in March 2007 might have expected to pay 7.5pc when the two years were up, as that was the SVR at the time. Instead, the SVR after Bank Rate fell to 0.5pc in March 2009 was just 2.5pc. This borrower's monthly payments would have fallen from £1,563 to £521, saving them £37,512 over the past three years.
But many home owners chose instead to maintain their payments when interest rates fell. This has the effect of paying off an extra slice of capital every month, cutting the overall interest bill and allowing the mortgage to be paid off in full sooner.
The average tracker mortgage customer with a £250,000 loan would have saved £1,978 in interest over the past three years if they had maintained payments at the level of December 2007, while their mortgage term would have been cut by almost 10 years.
Many people have both savings and a mortgage, of course. As we have seen, their savings will often have paid very little interest over the past three years. A better use for the money can be to reduce the mortgage balance.
If a home owner with a £250,000 mortgage on a typical lifetime tracker charging 3.56pc had used their savings to make a £20,000 lump payment on their home loan in March 2009, they would have saved £2,886 in interest so far and would be in line to shave two years and nine months off their mortgage term, according to HSBC. The figure for a £50,000 payment is £6,262.
Mark Harris of SPF said: "While interest rates are at record lows, not all borrowers are taking advantage. If you are on your lender's SVR and it's 3pc or more, you might want to consider remortgaging. There are some very cheap fixed rates at less than 4pc for five years, or two-year trackers starting at less than 2pc for those with enough equity in their property."
Peter Dockar, the head of mortgages at HSBC, said: "By paying down their mortgage now, borrowers are able to reduce the impact of higher monthly repayments if interest rates rise. It will also build up equity in their properties, giving them access to better deals if they need to remortgage in future."

'I've bought more shares in Lloyds and RBS'

'I've bought more shares in Lloyds and RBS'
Leading UK fund manager Richard Buxton on why he favours financials.

Richard Buxton, fund manager at Schroders
Richard Buxton, fund manager at Schroders 
This June, Richard Buxton will have been managing the £2.5bn Schroder UK Alpha Plus fund for 10 years.
Launched to combat "sideways" markets, Mr Buxton's fund has met its mandate handsomely. If you had invested three years ago you would have doubled your money. We get his views below.

You said you 'couldn't wait' for 2011 to be over. What is your current market outlook?

If the market is particularly stressed, as it was in the second half of last year, any cyclical or long-term holding tends to go down.
The turnover on our fund is extremely low – we are looking at least a three to five-year view for all our holdings – and as a result we had a bad year. Clearly the moves by the European Central Bank in December have been a bit of a game-changer. We were concerned that a major European bank, or two, could end up in severe difficulties. It is no surprise given how depressed sentiment was at the tail end of last year that the removal of that risk has led to happier markets.
We have not repositioned the fund after a bad 2011, but we did add to the badly performing positions – Lloyds and Royal Bank of Scotland, for example. This year, the mood music has changed – we have had a better start. We knew there would eventually be stimulus, I just couldn't believe how long it took the ECB to do what they needed to do.

How long will this positivity continue?

We think it will be better this year, but it's still a mixed picture. There is recovery and dividend growth but we're not out of the woods yet; there are still issues to face and much scope for policy error. After the financial crisis we are in an environment where there are shorter economic cycles. We are going to have to live with shorter mini-cycles, but I think that is all part of the post-crisis recovery. It may well last another three to seven years.

Which sectors will thrive in this environment?

Sectors where valuations are weakest, because there is the greatest uncertainty and maximum fear. Ten years ago, big tobacco companies were risky. But they've had a fabulous decade of re-rating, going from pariahs to being well-loved. Today, few people invest in banks because of uncertainty around them, so they are trading at half book value. But on a five to 10-year view, they may actually do very well.

How do you respond to the accusation that all UK equity funds are the same?

Rest assured, my fund looks very different from others. It is a concentrated portfolio that is not built in relation to the index: I don't hold big companies just because they are big.
We set it up almost 10 years ago with the view that the index was going nowhere, so you did not want to invest in index trackers or actively managed closely correlated funds.
There are fewer winners in this environment, but if you can identify them you can do well.

What has changed since you started in the City 26 years ago?

I joined in the middle of a 20-year bull market. Back then, making money was a lot easier. It is harder now. I can see huge value but I can equally see reasons why it will take a while for that value to be realised. You can still find fabulous companies capable of achieving year-on-year growth or value companies that have been poorly managed and new management has gone in. But you have to be patient.

What has been your best investment decision?

I only invest in my own fund, so I don't have separate personal stock holdings. I have been very proud of [technology stock] Autonomy. It was hugely controversial, with many non-believers, but we continued to ride the volatility and were vindicated last year with the £7.1bn takeover by Hewlett Packard.

And your worst?

As a house, Schroders is very balance sheet-focused so we haven't generally suffered because of a stock having too much leverage.
For that reason we are big shareholders in Home Retail, which owns Argos and Homebase, and which has had a dreadful performance. But we know it is a survivor. It is not going the way of HMV and Woolworths. So we're sticking with it.