The number one rule of making money

Unlike many investment groups, RH Asset Management doesn't see the point of making a swathe of New Year predictions. Instead the firm acts on some very simple principles, which John Robson and Andrew Selsby explain here.

It is customary in Newsletters at this time of year to deliver a series of predictions about stock markets, bond markets, currencies, etc.

We just don't see a lot of point in that, not least because it is often the case that the most outstanding investment in any one-year takes the investment community totally by surprise.

So although we have a very clear view of what represents a good investment opportunity today and our model portfolio demonstrates this, we can be pretty certain that the year will spring a number of surprises. Investments that today we wouldn't give house room to will probably generate significant gains. Others, about which we are very confident could let us down.

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Our model portfolio, which has had a very good year, is for comparison purposes only, compared to the FTSE 100. We do not consider that the FTSE 100 is a benchmark, simply a means of measurement. If, for example, in a particular year FTSE were to fall significantly, we would not consider it a successful year for our work if we simply lost less money than FTSE. We live and work in the "Absolute Returns" camp.

Although we are forced to accept a measure of volatility, we are determined that investment progress will not be allowed to head downwards without corrective action being taken.

We have often written about our processes. Every investment held by every client of R H Asset Management is monitored on a daily basis. Ed Easterling, president of Crestmont Holdings and author of the book Unexpected Returns' says "The first step towards making money is not losing it". Warren Buffett says rule number one is "don't lose money", rule number two is, "don't forget rule number one".

In order not to lose money, investments sometimes have to be sold, even though the fundamentals appear to be rock solid. To illustrate we quote another famous saying, by John Maynard Keynes "The market can stay irrational longer than you can remain solvent".

Studying charts is crucial because they tell us the one really important thing, which is what people are doing with their money. The fundamentals are important, but can be very misleading. You can take any company or any economic circumstance, analyse it to death and yet there is still one thing that you may not know, which will bring you down.

Central to our investment process is to have an open mind and consider views from all sources. However, first and foremost, it is about making money. The reality is that at RHAM we are in the investment business. Our clients trust us not to lose their money and expect us, over time, to generate above-average returns.

To do this, we must understand the economic story, but at the same time not fear taking a contrarian view. We must religiously monitor our clients' investment holdings and protect their wealth. At regular fortnightly intervals via the Onassis Newsletter we must explain as best we can what we think about what is going on, what we are doing about what is going on and what we expect the investment outcome to be from what is going on. Our main prediction for 2006 is that we will strive harder than ever to continue doing those simple but quite hard things.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

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