If you want to get rich, focus on investing in commodities for the next few years, applying some simple techniques that shouldn't take more than an hour or so of your time each weekend.
So says Mark Shipman, who has made a fortune for himself since leaving school at the age of 16, and is now investment adviser to a range of prestigious UK clients.
In a new book that is his first, he argues that successful investing is not an intellectual challenge, but an emotional one. "All you really need to possess is a certain mental attitude and the discipline to follow an approach that exploits major long-term trends whenever they occur."
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- Develop an investment strategy based on a few simple rules, and stick to it. One based on price-based signals (reading charts) is the best.
- Identify a strong trend, get aboard and stay with it. You must follow a strategy that forces you to run profitable positions while taking you out of losers.
- Buy-and-hold is a foolish approach to investing as it offers no protection against market collapses such as happened with Japanese equities in 1990 and American tech stocks in 2000.
- Buying an asset because it seems "cheap" is a dangerous investing tactic.
- The best kind of asset allocation is one where you are either in selected high-growth investments or out of them (in cash). Not one where the approach is risk reduction through a diversified spread of asset classes.
- Look for investments that are currently unloved and unfashionable, but are signalling that they have started a long-term uptrend.
- However, don't refuse to invest in a trend already well under way because prices have already reached all-time highs. This is the most bullish situation in which to invest or to remain invested. Bubbles can offer excellent opportunities to make money.
- You'll never get rich if you follow a policy of taking quick profits. Get into the right investments and stay in them until there are clear signals that it's time to exit.
Shipman says you should use charts to time your entry into an investment. He favours weekly charts as these screen out most of the short-term speculative "noise."
Using 40-week moving averages, he looks for sustained momentum in the average itself; and a latest weekly price both above that average and above the level of the past 12 weekly closings.
As well as giving a signal when to buy, this approach provides a discipline for running profits.
Knowing when to sell is more difficult, Shipman says. In addition to using the inverse of these entry signals, watch for a sharp reaction against the current trend that comes without warning a negative telling you to sell. If the reaction turns out to be a "shake-out" false signal you can buy back in when your entry criteria are met once again.
However, you also need to ask: Is the market in its euphoric phase, with abundant and near-universal optimism? The first big reaction against an exponential upside breakout in such an environment tells you that you should liquidate immediately. It's a tough decision to take, but you must do so.
Like me, Shipman believes that commodities are now the principal sector for investors to be. His key reasons:
- Despite big rises recently in nominal terms, in real (inflation-adjusted)terms, prices are not far above Great Depression levels.
- Over long periods, such as 40 years, commodities have been shown to be better investments than shares, bonds or real estate. And to have a low correlation with those assets.
- The shortage of books on investing in commodities suggests that we're still in the early stages of a long-term boom.
- Strongly rising demand from China and India is out of balance with supply constraints because of low investment in new mines, oilfields, plantations and shipping capacity, and shortage of skills (geologists, mining engineers, agricultural experts).
"We have re-entered a period of profit opportunity not seen since the late 1960s," Shipman says.
The Next Big Investment Boom by Mark Shipman, published by Kogan Page. ISBN 0 7494 4577 7. $27.50/£14.99.
By Martin Spring in On Target, a private newsletter on global strategy
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