With market volatility showing no sign of abating, Terry Bond offers some wise words on how best to choose your investments...

Fulfilling the demands of the day job, I spent a sunny Sunday in July with a group of about 70 private investors in Kent. We were guests at the home of one of Britain’s canniest investment gurus, Michael Walters. Along with a couple of other Plc chairmen, I was there to talk about the fortunes and otherwise of our AIM companies, and Michael’s investor friends were there to listen and ask questions. 

Because I am also a private investor, I felt a bit like a poacher turned gamekeeper; nevertheless, it was a stimulating session where both sides gained a better understanding of the other’s point of view.

After the meeting a few of us retired to a local hostelry and the chat got round to investing techniques. Not surprisingly, there were a variety of approaches depending upon individual aspirations and risk tolerance, but a handful of rules were constant, and as ‘time’ was called I jotted them down.

Use your own money
No matter how tempting it may be, use your own money to buy shares. Don’t borrow. As you get caught up in this game, particularly when you have had a run of good luck, it is very tempting to delve into the overdraft. Forget it. This is a hairy business, and finding winners is hard enough without adding the burden of debt.

Own what you know
Really understand the stocks you own, what the company does, its business model, its customers and its competition. Don’t own too many different shares, as you will not be able to monitor them on a daily basis. Our little group in Kent decided that six shares was the ideal portfolio size for an individual private investor. I would add that an investment club should have the same number of shares as members.

Tips are for horses
Nods and winks are for the racecourse. To buy shares on a hot tip is just plain silly. By all means listen to suggestions – invariably that’s how your initial juices start to flow – but make sure that you carry out all the checks and balances before you part with a penny. Your research must give you complete confidence in the future of the company and more; you must find out if the asking price for the share is fair, undervalued or overvalued.

Never try to catch a falling knife
When prices start to fall there is a temptation to average down – buy more of the same at prices less than the original purchase cost in the hope of cushioning losses. Don’t. Research shows that most  people who average down lose money by doing so. Far better to average up by adding to a winning holding.

Lose a loser
I’ve not met a seasoned investor who has not at some time been badly burned by failing
to ditch a loser, so be prepared to quickly admit it when you have made a mistake. Constantly monitor your portfolio, and if one of your babies starts to look sickly then check the reason you bought it. If things have changed fundamentally, don’t hesitate – sell.

Back winners
If you find a winner, love it. Don’t listen to those who say you should set a stop-gain figure or sell half when the price doubles. It is hard enough to find thoroughbred shares, so as long as yours keeps beating the field back it as hard as you can. But watch it carefully. If it starts to show signs of slowing down, that’s the time to consider selling.

Sleep well
Sounds trite, but we are not all the same. There are those to whom risk is anathema. No matter how much effort they put into research and how carefully they validate the basics of a company, they will begin to worry as soon as they buy the shares. They will suffer from insomnia, headaches and probably panic. If you fall into this category, please don’t put yourself through the agony. Forget shares. Rely on the fixed rates of the major banks or, better still, the building societies. A good night’s sleep is worth its weight in gold.

Terry Bond, who helped to establish the investment club movement in Britain – in ten years over 12,500 clubs have been started – is himself a member of the Frantoio Club in London. The club has a dozen members and meets at lunchtime in an Italian restaurant on the Kings Road.