Mutiny in the ranks! The inexperienced infants, chastened by the stock market dips that have plagued the latter half of the year, are daring to question the wisdom of their teacher. At the last meeting of the Frantoio Investment Club, the members had the nerve to suggest that we should reconsider our investment policy.

‘What’s gone wrong?’ asked Big Andrew, emboldened by a glass of Barolo-style red and looking directly at me as he spoke. ‘We listened to you because you’ve been investing for years and we are new to the game.’

Lacking patience

Big Andrew wasn’t finished: ‘Buy shares in big companies, you said. Make sure they have got proven track records, you said. We are looking for investments that are as safe as the bank you said – they will give us a good strong base for the portfolio.

‘Safe as the bank? You were probably right there because after Northern Rock most of the bank shares fell out of bed, just like our portfolio. I reckon we should admit our mistakes, sell the lumbering giants and buy some really exciting little shares.’

Only Big Andrew was brave enough to say it, but there was considerable harrumphing and even a couple of hear-hears from our fellow members. Fortunately, I have the ability to hold my breath until my ears go red and if I wrinkle my eyes and think of something really sad, like Iraq, I can squeeze out tiny tears. The sympathy ploy always works and within minutes the meeting was full of ‘there-theres’ and ‘never minds’.

Keep your eye on the ball

To be fair, the rather inauspicious start to the club’s investment life has not been entirely my fault. In theory, our stop-loss policy, adopted by the club although most of the members were not sure how it worked, should have minimised our losses, but it failed miserably because the treasurer went on holiday. However, there’s no escaping the fact that, at my instigation, the club did opt for a safety-first approach and success has not yet come our way.

The explanation is, of course, that stock market investing is a long-term business and if the rough comes before the smooth, that is simply part of the cycle. When it happens, inexperienced private investors (and investment clubs) invariably have a tendency to panic, enhancing the reputation that the amateurs have with their professional City colleagues: they buy at the top and sell at the bottom.

Playing by the rules

So what to do? With order restored and Big Andrew consigned to his box we debated the future policy. A decade of dealing with collections of amateur investors has taught me that to avoid disaster there must be a set of investment rules. I have also learned that if the rules are to stand any chance of being obeyed they must be so simple that a class of five-year-olds will understand them. So here are the criteria approved by the Frantoio club – feel free to copy them for your own club.

1. We will own what we know and know what we own. That’s a clever way of saying that we will not invest in a company whose product or service we do not completely understand. Thus at least one member must have a knowledge of the company and how it makes its money, and he or she must explain that to all the other members before we agree to buy the shares.
2. We will only invest in a company that is already making profits, and has been doing so for at least two years.
3. We will operate a stop-loss policy with no exceptions.
4. There are no other rules.