Use This Simple Rule to Pick Winning Shares

LONDON -- When it comes to investing, it's all too easy to get bogged down in technical details and miss the really obvious clues -- the evidence of our own eyes. I've developed a simple rule that has helped me identify goodbusinesses and steer clear of bad ones.

The original 10-baggerBetween 1977 and 1990, the U.S.-based Fidelity Magellan Fund was the best-performing fund in the world. The fund's manager during this period was Peter Lynch, the man who coined the term "10-bagger."

Lynch's record as a growth investor is second to none, and in his book One Up on Wall Street, he explains how some of his most successful investments were the result of anecdotal evidence and personal experience, rather than stockanalysts' reports.

My Lynch ruleI've developed my own version of this approach, which I've found works well for a surprising number of business: If I wouldn't want be a customer of the business, then I don't want to be a part owner of it either.

This rule made selecting some of the FTSE 100 (UKX) shares that lie at the heart of my portfolio much easier. I've written before about how virtually all of us are customers ofGlaxoSmithKline (LSE: GSK.L  ) -- a company whose products are an integral part of the fabric of modern life.

On a more mundane but no less important note, I have been a regular Tesco (LSE: TSCO.L  ) customer for years. Not only is there a Tesco Express within a short walk of my house, but there's a larger store nearby, too -- and both offer the best combination of pricing and availability in my local area. Needless to say, both stores are always busy.

Similarly, my electricity and gas come from Southern Electric -- part of dividend king SSE, while much of my diesel comes from Royal Dutch Shell (LSE: RDSB.L  ) , whose sustainable 4.8% yield and massive reserves give me confidence that the company will remain an attractive investment for decades to come.

In fact, there is only one FTSE 100 company in my portfolio that breaks my rule. I am pretty sure I will never be a direct customer of defense giant BAE Systems -- but I am fairly sure the government will continue to pay BAE a portion of my tax bill every year, which should be reflected in the company's excellent dividend record.

A sporting chanceNothing illustrates the importance of keeping your eyes open when investing more clearly than Sports Direct International (LSE: SPD.L  ) and JJB Sports.

As their updates last week showed, these two companies may be in the same business, but they are operating in completely different worlds. Both chains have large stores in the town where I live and a visit to these shops is just as educational as a look at the companies' financials.

Sports Direct is always full of stock and bustling with customers -- you always have to queue at the till. JJB, on the other hand, is a similar size shop but carries about a quarter of the stock and has very few customers. You don't need to be an accountant to work out which company is in better health.

Expert adviceOne man who knows how to identify a long-term profitable business is Neil Woodford, one of the U.K.'s most successful fund managers. Between 1996 and 2011, his stock choices rose in value by 347% -- outperforming the 42% gain of the wider market by a country mile.

Neil Woodford now manages more money for private investors than any other City manager, with a whopping 20 billion pounds of our money in his hands. In the last five years alone, his High Income fund has gained 15%, more than double the 7% return of the wider market.

The good news is that you can find all the details of eight of Neil Woodford's biggest holdings in this special free report from the Motley Fool, "8 Shares Held By Britain's Super Investor."

By Roland Head

July 23, 2012

http://www.fool.com/investing/general/2012/07/23/use-this-simple-rule-to-pick-winning-shares.aspx#.UBM2g2GO2So

WARREN BUFFETT THE BILLIONAIRE NEXT DOOR

BBC Documentary Warren Buffett

The shocking truth about growth investors ... is that they are right.

The shocking truth about growth investors

Growth investing and growth investors are dirty words to many value investors.  A focus on growth is often called the Greater Fool Theory, and study after study shows that growth investing performs badly when compared to value investing.

As a value investor, it’s easy to mock growth investors with reams of data and an air of self-satisfied superiority.  There is a slight problem though.  The shocking truth about growth investors is that they’re right.  Growth investing is a fantastic way to make money in the stock market, as long as you do it right.

Warren Buffett is a growth investor

Buffett is usually considered a value investor, and that’s because he is one.  But he’s also a growth investor, and with the help of Charlie Munger they pioneered a hybrid approach where they combined the best of both worlds – long-term growth companies bought at value investment prices.

It was Buffett’s focus on outstanding businesses which could grow both quickly and consistently that really took him to the top of the world’s richest people list.

The FTSE 100 as a long-term growth investment

As a UK investor my focus is always on beating the FTSE 100 in the long-run.  The FTSE 100 beats some 80% or so of private and professional investors alike, and so if I can beat the FTSE then I know I’m doing much better than the pros, which is always nice.

I also know that my time and efforts are not wasted, because any investor can invest in the FTSE at almost no cost in terms of either time or money.  If you are not beating the FTSE 100 then you are effectively wasting your time.

As a growth investment, the FTSE 100 typically grows both earnings and dividends faster than inflation, and it does so relatively consistently over the years.  That growth ultimately drives the index level higher, regardless of how pessimistic the market may be.

In order to beat the market, we need to turn our portfolios into supercharged versions of the index, with superior growth, superior yields and superior valuations.

We all want growth, but growth of what?

For me, the most important numbers that need to grow are revenues, earnings and dividends.

At the end of the day, it’s the earnings and dividends which set the range within which a share price will fall (exactly where it falls within that range is up to the market), and both of those ultimately derive from revenues.

Long-term growth is all that matters

Short-term growth, positive or negative, is mostly noise and is unlikely to provide any useful information to investors.  If you find yourself trying to make money out of the day-to-day news then you might have inadvertently become a trader rather than an investor.

When I’m talking about growth, I mean long-term growth over as long a period as you can sensibly get data for.  For me this means looking at 10 year data for every single company that I’m interested in, and if it doesn’t have 10 years of public data available, then I won’t touch it.

This means that Facebook was out of the question, no matter how attractive it may or may not have been.

Where to get your data

Getting data that goes back 10 years can be tricky, but it is available through services likeSharelockholmes, Morningstar Premium, ShareScope and Stockopedia.

You can also get the annual results yourself and copy the information into a document or spreadsheet and use that.  I like to get annual report data from investegate.co.uk because it has a nice, lightweight and fast interface and I’m used to using it.

One slightly odd feature is that nobody seems to provide revenue per share.  We always get earnings and dividends per share, but not revenue per share.

If you want revenue per share, as I do, then you can either ask a data provider to provide it or get hold of the number of shares outstanding figure for each company you’re interested in.  Just search the annual reports for ‘shares’ and it should appear somewhere.

Of course you can always get your initial data from my newsletter, the Defensive Value Report, which gives high level data such as PE10, G10 and yield (all of which I’ll cover in upcoming posts) for all FTSE 350 companies.

Okay, so let’s get into the details…

How to measure revenue growth

The simplest way to look at 10 year growth is to just compare the revenue per share figure from the latest annual report with the one from 10 years ago.

I’ve tried various combinations to find the most accurate and robust measure of long-term growth.  I’ve tried looking at the average of the growth from each individual year, or combining 10, 5 and 3 year growth rates, but after much experimentation it seems that a simple 10 year growth figure is as good as anything else for highlighting long-term growth companies.

One caveat with revenue is that some companies don’t have revenue numbers.  Depending on where you get your data you may not see revenue for banks, insurance companies and various other types of businesses.  In these cases you’ll just have to look through the annual reports to work out what the equivalent of revenue is.  For example, with insurance companies I use net written premium.

How to measure earnings growth

For earnings I prefer to look at adjusted earnings.  The reason for this is that I’m looking to measure growth over time, so I need a reasonably smooth and less volatile number to measure, and adjusted earnings tend to be less volatile than basic earnings.

With basic earnings, even in very stable businesses you can have big changes in a single year, or even losses which will mess up any long-term growth calculation.  For example, if the loss doesn’t impact the company’s long-term earnings power.

Earnings power is a term that I like because it conveys the idea of a company’s ability to earn money, not just the actual amount that it earns in any one year.

If you look at BP for example, then the last 10 years basic earnings look like this:

So in 2010 there was a big loss in basic earnings.  If we were to take the 10 year growth figure in 2010 we’d have a negative 10 year growth number for that period, which would be hugely misleading.

This is less of a problem for revenues because that’s a more stable number and is never negative.  With dividends the problem does exist, but to a lesser extent because dividends are typically more stable than earnings.

By looking at adjusted earnings instead of basic earnings we can get a clearer picture of what the company is actually doing, and how the earnings power may be changing through the years.

But we can go a step further.  Ben Graham came up with a scheme for reducing the volatility of earnings even more, giving perhaps an even better picture of how the company’s earnings power is changing.

Graham simply took the latest 3 year average of earnings and compared that with the 3 year average from 10 years ago.

To get the 3 year average from 10 years ago you’d need the data going back 13 years (as the earlier average would be from years 13, 12 and 11).  If you only have access to 10 year data then you can just use the same system but just using the earliest 3 years that you have, which actually gives the 7 year growth rate between the two 3 year averages.

In the BP example above, we’d compare the average of 15.64, 22.88 and 36.48 (which is 25) to the average of 45.49, 77.48 and 79.04 (which is 67.34).

The growth over that period is 169%, according to my spreadsheet.

And talking of spreadsheets, if you want to know the annualised growth rate over that period you can just use the rate function in excel, which would look like this:

=RATE(7,,-100,269)

Where 7 is the number of years, -100 is the ‘present value’, and 269 is the future value (i.e. 100 plus the 169% increase).

The answer is that the 3 year earnings power of PB grew by an annualised rate of 15.2% per year in that 7 year period.

How to measure dividend growth

Like revenues, dividends are generally more stable than earnings, especially with the kind of large, market leading, relatively defensive companies that I’m interested in.

For that reason I generally just use the 10 year growth rate in the same was that I do for revenue.

However, I’m always experimenting with different ways of measuring past performance.  I want the most accurate and robust methods for finding companies that can grow quickly and consistently over many years.

That may mean that at some point I might change my dividend growth measure, and if it does it’s likely to change to the same approach that Ben Graham suggested for earnings.

Putting it all together

I call my growth metric G10, because otherwise it’s a massive mouthful to say that it’s the average of the 10 year growth of revenues, adjusted earnings and dividends, where the adjusted earnings growth is calculated as the growth between the latest 3 year average and the 3 year average from 7 years ago.

Just because this is a relatively complicated measure of growth, it doesn’t mean that it has magic powers.  It’s just as likely to throw up anomalies and rubbish companies as any other numbers based approach.

However, it’s a sensible first step towards finding companies that can grow earnings and dividends faster than the market, consistently and over long periods of time.

What it doesn’t really address is consistency.  So for consistency I have a separate metric which I’ll cover in my next post.

http://www.ukvalueinvestor.com/2012/07/the-shocking-truth-about-growth-investors.html/?utm_source=UK+Value+Investor+Weekly+Newsletter&utm_campaign=b0bc20d760-UK_Value_Investing_Weekly7_14_2012&utm_medium=email

Strategies that bear results

Strategies that bear results 
July 18, 2012


Barbara Drury asks four fund managers where to look for stocks that offer good dividend income and growth.

Buy in gloom and sell in boom is sharemarket advice that has been proved right over and again. There is no doubt that investors are gloomy; the question is, are we gloomy enough yet?

''The problem is that no one will ring a bell and tell you it's time to get back into the market,'' the chief executive of Lincoln Indicators, Elio D'Amato, says.

''You only make money in stocks by buying low and selling high. If you want your investments to perform over the long run you need exposure to growth in up-and-coming companies.''

That's a difficult message to sell when Australian shares fell 11.1 per cent in the year to June 30. Size and quality were no defence, with only five of the top 20 stocks posting gains. After a year such as that, it is a brave investor who shifts money from the safety of a bank deposit into the uncertainty of shares.

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But the tradeoff between risk and reward is slowly shifting as the yields on term deposits fall along with official interest rates.

Where investors were able to get a guaranteed return of 6 per cent on a one-year term deposit 12 months ago, the going rate has dipped to less than 5 per cent and is expected to fall further.

Yields on 10-year government bonds are skirting 3 per cent, down from more than 5 per cent two years ago.

By comparison, the dividend yield on the local sharemarket is close to 5 per cent and it is possible to construct a quality portfolio including the banks and Telstra with a dividend yield of about 7 per cent; more including franking credits. This widening gap between the risk-free return from cash and bonds and the priced-for-risk return from shares is getting more tempting, but investors should not expect miracles.

The Australian market looks cheap at the moment at 10.8 times earnings compared with a historic price-earnings ratio of 14.5. But experts warn that growth will remain elusive while the world is deleveraging, Europe remains in crisis, US growth is anaemic and China is slowing.

''At the moment markets are so sceptical they don't believe anything people tell them and they don't believe growth till they see it. That's where the opportunities are,'' the head of Australian equities at Fidelity, Paul Taylor, says.

A dividend strategy focused on the big end of the market is a rational response to the current investment climate, but if you want a bit of growth with your income you need to cast your net wider.

ROB TUCKER, S.G. Hiscock

The SGH20 portfolio manager, Rob Tucker, says it is difficult to beat the overall market return if you only invest in the top 20 stocks. In the SGH20 fund (seeking the best 20 investment ideas from the top 300 stocks) CSL is one of only three top-20 stocks. ''We think we can add value where stocks are under-researched and undervalued,'' he says.

He says dividend growth might stall in the next 12 months, posing a trap for investors in so-called defensive sectors such as utilities. These utilities face regulatory resets - where their regulated return is lowered to match the change in the risk-free rate (10-year bond).

This means dividend payments are likely to be lower for these stocks over the next two years to three years.

''It's important not to buy shares just for yield,'' Tucker says. ''You can't have all your money in telcos, banks and utilities; you need to diversify.

''Equities are still growth assets, so we focus heavily on free cash-flow growth, which should support dividend growth on a three- to five-year view.''

Tucker looks for stocks with a strong economic moat such as the pricing power that comes from a strong brand or patent and high barriers to entry into their market. The fund currently has a bias towards healthcare stocks that are well positioned to benefit from the higher spending of an ageing population.

Tucker says Ramsay Health Care is in a good position to help the government solve the shortage of hospital beds and looks set to deliver 13 per cent compound dividend growth during the next three years. It currently sits on a dividend yield of 2.4 per cent.

Blood plasma group CSL is a solid performer with a global franchise and a pipeline of new products that should help the group grow organically. It has low debt and generates good free cash flow to fund acquisitions or share buybacks. Engineering consultancy WorleyParsons offers exposure to the mining services sector, which has been heavily sold recently. Tucker says Worley is one of the top global players in its field and is well positioned in the oil and gas sector. He expects the pipeline of capital spending in the LNG and shale oil industries will be robust during the next five years, providing longer-term growth. In the meantime, investors get a 3.8 per cent dividend yield.

Cardno is a professional infrastructure and environmental services company. Because it invests in professional employees it is not capital-intensive and generates good free cash flow, not to mention a dividend yield of 5.1 per cent, with an estimated 15 per cent dividend growth rate over the next two years.

Treasury Wine Estates is a turnaround story with minimal capital investment over the next three years. Tucker says the value of the company's wine inventories is not reflected in the balance sheet and is currently undervalued by the market.

He says the brand-conscious Asian market should provide a good five-year growth story for its premium Penfolds labels.

GEORGE BOUBOURAS, UBS Wealth Management

The head of investment strategy at UBS Wealth Management, George Boubouras, recommends a combination of quality cyclical stocks leveraged to growth in sectors such as mining, energy and consumer discretionary, with defensive stocks such as utilities, telcos and healthcare with cash flows that can deliver sustainable dividends. 

''Investors need to be able to sleep at night,'' he says. ''If you are not sleeping, you are in the wrong portfolio.''

Boubouras acknowledges that popular dividend stocks are expensive but says investors are prepared to pay for the certainty of dividends.

''Volatility is not going away and the market still faces challenges,'' he says. ''Earnings growth and good-quality dividends is all I'm aiming for in the current environment.''

He recommends accumulating Telstra shares on any price dips for its quality dividends from strong cash flow business models.

Westfield offers investors exposure to its quality global options and dividend-focused domestic business with a dividend yield of more than 5 per cent.

''One can search for higher yields but, as always when chasing a dividend, search for certainty of delivery,'' he says.

For a more defensive stance, AGL Energy has the largest retail customer base in the country, which Boubouras says offers the most defensive exposure to the utilities sector, plus a dividend yield of more than 4 per cent. Transurban is a quality infrastructure asset with predictable cash flows from toll roads in Sydney and Melbourne providing a dividend yield of more than 5 per cent.

Boubouras says Coca-Cola Amatil is currently expensive. However, he says the business generally trades at a premium to the overall market because of the certainty of its earnings and its reliable 4 per cent dividend yield.

PAUL TAYLOR, Fidelity Worldwide Investment

Despite the slow growth outlook, Taylor says some sectors and stocks will grow faster than others. He is investing in high-quality companies with strong balance sheets and good growth prospects and/or a high and sustainable dividend yield.

''If you can find a dividend yield of 7 per cent and earnings growth of 3 per cent, that's quite a strong position in a low-growth world,'' he says.

Taylor says companies that deliver sustainable dividends will be bid up in this market but company strategy is vital. He says Sydney Airport is a good long-term investment because of its strong and sustainable dividend yield (currently 7.2 per cent) and structural growth. ''It is one of the few China consumption plays as Chinese become more important to our tourism market'', he says.

Insurer Suncorp Group is more of a turnaround story. Not only was it hammered by natural disasters including the Queensland floods but it was caught out in the financial crisis with bad loans to property developers.

''We think its problems are cyclical, not structural,'' Taylor says. ''We think it should be a 15 per cent ROE [return on equity] business, not a 0.75 per cent ROE business, so there is a lot of upside. It was one of the only insurers to pay out on flood insurance, which was good for the brand.''

Taylor also likes Goodman Group. While retail and office property are weak, industrial property has been a beneficiary of the internet because it creates more need for distribution hubs rather than retail space.

It currently offers a dividend yield of more than 5 per cent.

One of the themes of Taylor's portfolio in the current market is to focus on the essentials of life such as supermarkets, banks and energy while consumers shun discretionary spending.

He says Origin Energy has been marked down because of uncertainty surrounding its coal seam gas to LNG project in Queensland, cost blowouts and speculation that the company may need to raise equity.

''All that is already priced into the stock and as we get more clarity it will provide price upside'', he says. In the meantime you've got a good stable business with a dividend yield of 4 per cent.

ELIO D'AMATO, Lincoln Indicators

D'Amato is confident that shares will hold up in the second half-year, with companies supported by low interest rates, no inflation, falling oil prices and low wage growth. He urges investors to use this period of market weakness to weed out poor-performing companies and consider unloved stocks that are fundamentally good businesses.

Heavy share-price falls during the past few months have exposed some attractive valuations, especially in the unloved mining, energy and mining services sectors. He singles out copper and gold producer PanAust, Maverick Drilling and Exploration and global drilling and services company Boart Longyear, which all have strong forecast earnings per share growth but are trading at a discount of more than 30 per cent below Lincoln's valuation. Boart also has a forecast dividend yield of 4.89 per cent.

Similarly, iron ore heavyweight Fortescue is trading at a 27 per cent discount to Lincoln's valuation of $6.60 a share. D'Amato says the latest low inflation figure out of China adds weight to his belief that it is near the bottom of a cyclical downturn and iron ore will be leveraged to the recovery when it occurs.

''It's important to get on these trains before they leave the station,'' he says. ''Don't put all your money in at once but in three or four parcels over time.''

D'Amato says Corporate Travel Management, a global corporate travel operator, has the ability to continue to beat expectations with forecast earnings growth of 19.8 per cent a share. ''The market is always a risk/reward tradeoff. At the moment you can get a good yield investing in the banks rather than putting your money into one,'' he says.

Read more: http://www.theage.com.au/money/investing/strategies-that-bear-results-20120717-226wr.html#ixzz21VgO8T3T

Investor time horizons are increasingly measured in nanoseconds. However, long-term investing makes sense.

Warren Buffett is all the proof John Kay needs that long-term investing makes sense 

The Kay review identifies the problem, but tackling corporate and investor "hyperactivity" needs a cultural revolution.

Billionaire investor Warren Buffett Photo: AP

By Alistair Osborne, Business Editor

7:36PM BST 23 Jul 2012

8 Comments

John Kay must be an optimist.

He’s just produced a 113-page report into short-termism in UK equity markets. Who does he think’s got the concentration span to read that? Three pages would be a stretch for most of the people it’s aimed at. And that’s allowing for page 2 being intentionally blank – like the mind of any top City trader.

Luckily, you don’t have to delve too far into Kay’s critique of “hyperactive” companies and investors all seeking “immediate gratification” to spot that the economist has done an OK job of identifying the problem. Whether his recommendations will ever fix it is another thing entirely. Even Kay admits he can only offer “long-term solutions”, which sounds kind of circular.

For him, the blame for the current knee-jerk investment environment is shared pretty equally between companies and shareholders.

UK-listed companies continually lag their peers in Germany, America and France when it comes to traditional benchmarks of long-term thinking, such as business investment or R&D spend.

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And it’s not hard to see why when companies are run by bosses caught awkwardly between their next bonus or a pay-off, with the average tenure of a FTSE-100 chief executive less than five years. No wonder they tend to go for the supposed quick fixes of internal shake-ups, financial engineering or M&A rather than making decisions that might reward their successor. They do that too, as Kay shows, despite nasty history lessons from the likes of GEC, ICI and Royal Bank of Scotland.

Meanwhile, investor time horizons are increasingly measured in nanoseconds – and not only those of high-frequency traders otherwise known as computers. Quarterly targets and the bonuses that ride on them have made fund managers increasingly twitchy, while the distance between the company and the saver who wants to invest in it has been lengthened by a costly chain of middle-men each taking a cut, including investment consultants, independent financial advisers and pension trustees. What gets lost in the process is any real engagement between the company and its shareholders.

Kay’s solution for all this, as he admits, amounts more to cultural revolution than quick fix – a sort of everyday “shareholder spring”. Among his 17-point plan is the proposal to axe all cash bonuses for directors, replacing them with share-based awards that must be held “at least until after the executive has retired from the business”. He’d also like an end to mandatory quarterly reporting (wouldn’t we all) for both fund managers and companies.

Then there’s his proposal for a new stewardship code that goes beyond the current focus on corporate governance to push shareholders to ask hard questions on such things as strategy and capital allocation – though if they’re not doing that already, what are they getting paid for? He’s keen too on a new “investors forum”, so shareholders can club together to club the management or, as he ventured on Monday, to help sort out the Barclays board – even if that looks wishful thinking.

Sure, much of this, if ever implemented, might encourage a more long-term approach – though Kay could have saved himself some words by getting to the apotheosis of such investment earlier than page 56. It’s there he mentions the man who once declared “our favourite holding period is forever”, adding: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

As one of the richest men on the planet, Warren Buffett kind of makes Kay’s case for him.

http://www.telegraph.co.uk/finance/comment/alistair-osborne/9421860/Warren-Buffett-is-all-the-proof-John-Kay-needs-that-long-term-investing-makes-sense.html

Markets shrink: it's normal so be optimistic

July 21, 2012
Annette Sampson
Personal Finance Editor

Have we hit capitulation yet? It has been a while since we've dragged out the investor sentiment cycle, but when the head of investment strategy for AMP Capital Investors, Dr Shane Oliver, included it in his latest newsletter, it seemed time for another look.

Markets are only partly driven by fundamental considerations such as value and dividend yields.

Their real impetus comes from emotions such as fear and greed.

And while those emotions can seem erratic over the short term, in the longer term, investor psychology is highly predictable.

As the graph shows, investors go through a roller-coaster of emotions in the typical market cycle.

Rising share prices spark a sense of optimism, which fast accelerates into excitement and the thrill of watching investments grow.

The top of any boom is characterised by euphoria when we think nothing can go wrong. This is the boom that will go on forever, and while we'd be smart to run for the doors when people start talking about ''new paradigms'' and how ''this time it's different'', most of us don't want to know. We've become overconfident, believing that our success is due to our own skill, not the fact that any idiot can make money in a raging bull market. And greed has well and truly kicked in, promoting us to chase more.

Rationally, this is the most dangerous point in the investment cycle. Prices become overvalued and the average investor is blind to the early warning signs. But no one wants to know.

When the market does inevitably take a turn for the worse, emotions spiral downwards through anxiety, denial (that's where the ''I'm a long-term investor, I don't need to worry'' bit is strongest), and, eventually, fear, depression and panic.

But it's not until investors give up hope that the cycle moves back into an upswing.

The bottom of any market cycle is characterised by capitulation and despondency. Just as investors believed the bull market could go on forever at the top of the cycle, they start to believe the bad times are here to stay. That's when you start to hear people talking about getting out of the sharemarket. Permanently. Because no matter what the pundits say, things aren't going to change. And just as the most dangerous time to invest is when markets are euphoric, the best investment opportunities arise when they are despondent.

In the 1970s, the long bear market led to pronouncements that equities were dead. Oliver reckons that is where we are again now.

The only problem is that while the psychology remains the same, no two market cycles are identical. And while you can be guaranteed that we will eventually move back to hope and optimism, there are no guarantees on how long it will take.

After an initial period of denial following the global financial crisis, markets have now woken up to the fact that Europe, and indeed most Western economies, will only truly recover when they have their debt under control. That will be a long and painful process.

Preserving capital makes sense when ongoing volatility is a high probability. As the investment director at Fidelity Worldwide Investment, Tom Stevenson, recently pointed out, if you lose a third of your money, you have to grow what you have left by 50 per cent to get back to where you started.

The fact that the big stocks are now highly correlated has also made short-term stock-picking profits hard to come by. The good gets trashed along with the bad.

But as Stevenson says, there are still excellent businesses out there with fantastic prospects. While shares in those companies won't bounce back immediately, he says in 10 years you might well look back and think this was a good time to invest in these long-term winners.

Oliver argues this period of poor returns isn't new; it's just something that markets do.

And as such, giving in to despondency can mean missing out on opportunities. Yes, there are plenty of reasons to be cautious, but he says it would be dangerous to write off equities altogether.

This story was found at: http://www.theage.com.au/money/markets-shrink-its-normal-so-be-optimistic-20120720-22f3l.html

11 Investing Lessons From Peter Lynch

by Alexander Green, Investment U Chief Investment Strategist
Wednesday, July 18, 2012: Issue #1817

Sometimes I almost feel sorry for the market timers.

There’s a reason famed money manager Ken Fisher calls the stock market “The Great Humiliator.”

Nobody can know with any certainty what the stock market will do next week, next month, or next year. The sooner you recognize that, the sooner you can start making money in stocks…

I learned this lesson from three world-beaters: Warren Buffett, John Templeton and Peter Lynch.

Going Outside My Research Department…

As a young man starting out in a stock brokerage 27 years ago, I made a startling discovery. The “analysts” at my firm picking stocks for clients weren’t just bad… they were awful. I soon found myself looking for ideas outside my “research department.”

After six months of sheer frustration, I had an epiphany…

If I were going to learn from someone else, why not the best?

Instead of listening to the talking heads at my firm, why shouldn’t I listen to the greatest investors in the world?

As this was the early 80s, it was Warren Buffett, who ran Berkshire Hathaway, Peter Lynch, who managed the Fidelity Magellan Fund, and John Templeton, who headed the Templeton Growth Fund.

These men had very little in common in their investment approaches:

• Buffett was (and is) a value guy.

• Lynch was a growth analyst.

• Templeton was a global markets pioneer.

But they all started from the same premise: They didn’t have a clue what the broad stock market was going to do.

That was fine, because they knew something much more valuable: how to identify companies selling for far less than their intrinsic worth. And when the market recognized that value, they sold them.

11 Lessons From Peter Lynch

For instance, Peter Lynch taught me:

• Behind every stock is a company. Find out what it’s doing.
• Never invest in any idea you can’t illustrate with a crayon.
• Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
• Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
• Time is on your side when you own shares of superior companies.
• Owning stock is like having children. Don’t get involved with more than you can handle.
• When the insiders are buying, it’s a good sign.
• Unless you’re a short seller, it never pays to be pessimistic.
• A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
• Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
• Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

A Valuable Investment Lesson for Any Investor

I know investors who have spent a lifetime (and a fortune) in the stock market and have still not learned this lesson. Or lack the intestinal fortitude to follow it.

Worse, there are a number of gurus out there who are convinced that they have the smarts – or a system – that allows them to get in and out of the market just in the nick of time. Yet you’ll notice that system (ahem) always goes on the fritz just as soon as you start to follow it.

Count yourself a sophisticated investor the day you wake up and say, “Since no one can tell me with any consistency what the economy and the stock market will do, how should I run my portfolio?”

The answer to that question is: a well-defined, battle-tested investment approach that achieves high returns with strictly limited risk.

Of course, everyone in the industry claims that they’re beating the tar out of the market.

Our approach is based on a market-neutral investment philosophy. Our focus is on teaching investors how to seek out the most undervalued opportunities in the market.

As Buffett, Lynch and Templeton famously proved, that’s what actually works.

Good Investing,

Alex

P.S. Peter Lynch often said he found some of his best-performing investments while visiting the mall with his family. Indeed, he noted that, “If you like the store, chances are you’ll love the stock.”

http://www.investmentu.com/2012/July/peter-lynch.html