An investor's guide to staying sane - forget the big picture

Investors can be overwhelmed by the sheer volume of daily economic data, forecasts and comment. Little wonder: this noise is designed to confuse you into trading too much. But the solution is simple, says Tom Bulford - ignore it. Here's what to focus on instead.

By Tom Bulford

published 20 April 2010

in Features

In 1981 the New Yorker magazine published a cartoon that I have never forgotten. It showed a man watching the evening news on television. Here is what the newsreader was saying:

"On Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that those rates would be inflationary sent the market down, until the realisation that the lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a re-imposition of higher interest rates."

This is as fitting a comment on financial markets as I have ever seen. And it carries some important messages for investors.

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The first of these is that the torrent of financial news and data that pours forth each day is bewildering. We have figures for GDP growth and GNP growth; we have data for inflation both the RPI and the CPI; we have figures for productivity, population growth, output and input costs, employment and unemployment the list is endless.

Then there are all the messages coming out of the company sector annual results, trading statements, strategy presentations, bids and deals. It's a hopeless task to attempt to digest all of this information. And yet many try.

But more important than this, the cartoon carries the message that in economics things are never quite what they seem.

Why you would never meet a one-armed economist

Falling interest rates are good for borrowers, but bad for savers. Where does the biggest advantage lie? Lower house prices are bad news for home owners, but great news for those who want to buy. One country's falling exchange rate is another's rising exchange rate.

There is an old joke that you never meet a one-armed economist because he would be unable to say: "On the other hand"

Armed with expensive technological machinery, clever people in the world's financial centres attempt to make sense of what is going on in economies. They do this despite the fact that things are changing all the time. In fact, they turn this constant changeability to their advantage, trading on it, selling products based on it and my goodness commentating on it!

Every day millions of words are said or written that attempt to shed some light on economic events and their consequences.

Wall Street, the City - and every other financial centre - are populated by armies of people whose job is to crunch numbers, spot significant patterns and communicate their conclusions to the outside world.

Of course, they are not simply doing this for the benefit of humankind. This mighty effort to comprehend the financial world has two intentions: one is to convince you and I that we do not know what is going on and that we should therefore pass responsibility for our financial fortunes to those that do; the other is to stimulate trading activity.

There is nothing that financial experts like more than to get us all into a frightful muddle, so that no sooner have we committed our money to bonds than we get cold feet and think we should switch into equities; or once we have decided to put our cash into BP, we wonder whether it was really such a good idea after all.

Why City experts love to confuse you

Indecision breeds activity, and activity means fat commissions for financial intermediaries. How quickly would your money disappear if you bowed to the prevailing winds described by that cartoon! You would have switched your funds four times in one day and ended up back where you began. Your broker would have loved it.

To make money you need a clear head, and here is how.

Begin by ignoring all of these daily data. You don't need financial experts to tell you that the UK economy is in for a struggle, that alternative energy is a promising industry, or that the world is running out of oil.

The backdrop against which business is operating is clear enough. So forget about the obfuscations of the City men. Here's one simple action that you should definitely take: resolve either to keep your money in a safe cash deposit somewhere, or else invest it in a straightforward business that can make and multiply its profits.

This is what I love about penny share companies. They are focused on just one business project, whether it be a new mine or a new medicine. Compared with monoliths like AstraZeneca or Shell they are simple to understand. And if they achieve their ambitions they will make lots of money.

Understanding companies is much easier than understanding economies and understanding small companies is easier than understanding large ones. For a clear headed approach, stick to penny shares!

This article was written by Tom Bulford, and is taken from his free twice-weekly email The Penny Sleuth

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.