Dragon’s top tips for taming the lion

Richard Farleigh
AS A youngster growing up in Australia my first ambition was to be a bushranger just like Ned Kelly. This nineteenth century outlaw was our own Robin Hood, except that he fought against police injustice wearing his bullet-proof helmet and vest made from steel. Eventually caught and sentenced to hang, his last words were “such is life”.
Fortunately for me, I entered the investment world instead. However, it too has its challenges. To meet those challenges, I developed the 100 strategies presented in my book, Taming The Lion. I was keen to write them up, because they are accessible to all investors. Here are five for you to chew over.

There are a host of examples: the big falls in inflation, technological innovation, emerging economies and China’s appetite for raw materials are just a few. They are phenomena without precedent. The big ideas cause big but slow changes in many markets. Seldom are these expected by economists and analysts who often struggle to see the wood for the trees. As an investor you can have plenty of time to get on board, so if you want to win big, get a big idea.

Do you really think you could spot a mistake in the market’s valuation of IBM? I think it is a mistake to try. I know of investors who get research notes and do a lot of homework on some of these big companies, and I strongly believe they are wasting their time. Their wins or losses are usually caused by movements in the general market or by luck, rather than by superior analysis of a specific stock.

Smaller companies have a greater chance of being wrongly priced. That is not to say that all small companies are good value. There are probably just as many that are overvalued, as are undervalued. However, some investigation and analysis may help you find the better small companies. In my experience, it is usually the quality of the management that’s most important.

There have been huge and sustained swings in most of the markets in the last 20 years and more. In each case, few predicted how far the price would move; not the economists, the media or the so-called experts. However, interestingly there was usually general agreement about the causes behind the moves. So stick with the big moves, even if the reasons become well-known and obvious.

Trends are too big to ignore. They are well known but not well used. If you are trying to be a contrarian and looking to pick up a bargain in a falling market, be aware that while it can be done, the odds are against you. If you want to buy a stock, it’s safer to wait for the price to start to move higher before buying.

All of these ideas are simple. But like most things, if you can do the simple parts well, the results can be stunning.

Since the mid-1990s Richard Farleigh has operated as a business angel, backing more early-stage companies than anyone else in the United Kingdom. Taming The Lion is published by Harriman House. He will speak at Active Trader on 24 May 2012: www.cityamactivetrader.com