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underperform comparable companies over a three-year period. Since small investors don’t receive fair allocations of the best IPOs but are landed with the duds, they should avoid the new issue market entirely.

      3. ‘Markets make opinions, not the other way round.’

      This is another Wall Street saying, which has been revived by James Grant, editor of Grant’s Interest Rate Observer. When markets rise, commentators find a way of rationalising the gains. Take the recent bull market. We were told that the ‘valuation clocks’ were broken and that companies deserved to trade on a higher price-earnings ratio. We were also told that US productivity had risen and that the US would experience a higher growth rate in the past. We were also told that Greenspan et al would prevent another cyclical downturn. All these comments were spurious rationalisations of an ‘irrationally exuberant’ market.

      4. ‘Buy low, sell high.’

      This advice seems obvious, but investors always ignore it. The demand curve for investment assets is like that for a luxury good - the higher the price, the greater the demand. Hence we see turnover rising during a bull market (when assets are getting more expensive) and falling during a bear market (when they are getting cheaper). Investors should always be prepared to act contrary to the market, and should always be prepared to question both the optimism at the top and the pessimism at the bottom.

      5. ‘When the rest of the world is mad, we must imitate them in some measure.’

      This observation came from the mouth of an eighteenth-century banker, John Martin, during the South Sea Bubble of 1720. It is another expression of the ‘greater fool’ theory, namely that you can buy over-priced shares and sell them on at a profit to some sucker. This speculative attitude has been much in evidence in recent years in the form of momentum investing. Of course, you can make money if you find a greater fool, but you also will lose your money if you don’t. Would you put $10,000 into a chain-letter? If the answer is no, then avoid momentum investing. Incidentally, Martin lost all his money when the bubble collapsed and complained miserably of being ‘blinded by other people’s advice’.

      6. ‘During a bull market nobody needs a broker. During a bear market nobody wants one.’

      This is another Wall Street saying, cited recently by Alan Abelson in Barron’s. An unkind English version comes in the form of a question: ‘What’s the difference between a good broker and a bad one?’ Answer: ‘Not a lot.’ We are now more aware than ever that most brokerage research is generally of a low quality and that broker recommendations cannot be followed profitably. This has always been the case, but the problem is exacerbated by the conflicts created by uniting brokerage and corporate finance under the same investment bank roof. Investors should avoid reading research by brokers whose parent company provides financial services for the company concerned.

      7. ‘Every man his own broker.’

      This is, in fact, the title of the first investment book, written by Thomas Mortimer in the 1750s. It was republished several times. If you can’t trust brokers, you must replace them. The problem is that the private investor is not well-equipped to do so. He doesn’t have access to company management and probably can’t read financial accounts with any sophistication. As a result, he is likely to make decisions on whim, many of which will be regretted later at leisure. Bull markets are periods of ‘people’s capitalism’ when the private investor figures prominently. Inevitably, the private investor gets burnt after the market collapses and withdraws from the market, handing it back to the professionals.

      8. ‘Markets can remain irrational longer than you can remain solvent.’

      This saying comes from John Maynard Keynes, the great English economist. He was also an acute observer of markets and a speculator. Keynes held his stock-market investments on leverage and was an active player in the commodities market. It is sometimes said that he lost three fortunes, but made four. So he died rich. The point of Keynes’s comment is that your observation may be fundamentally correct but it can take the market a long time to catch up. For example, the dotcom bubble ran for almost five years from the flotation of Netscape in the summer of 1995 to the Nasdaq collapse in March 2000. Many people lost a lot of money shorting the likes of eToys and Amazon.com before the market woke up to its absurd overvaluation of the sector.

      9. ‘A mine is a hole in the ground with a liar standing over it.’

      This saying also comes from Mark Twain. It should remind investors to be wary of all projectors, whether they are promoting gold mines, biotech or some other new-fangled technology. In general, the promise of outsize profits are followed by the reality of painful losses. You will make more money in the long run by restraining your greed. Incidentally, Twain had a personal investment maxim: ‘I never spotted an opportunity until it ceased to be one.’

      10. ‘Be diffident when others exalt, and with a secret joy buy when others think it in their interests to sell.’

      This advice comes from the English writer, Sir Richard Steele, in an article for The Spectator in the early 1700s. To my knowledge it is the first expression of a contrarian investment philosophy. The art of investment lies in judiciously going against the crowd. It is both intellectually more fulfilling to refute the market consensus and in the long run should be more profitable. Academic research suggests that unloved ‘value shares’ tend to outperform so-called ‘growth stocks’ over the long run.

      Moorad Choudhry

      Moorad Choudhry is a vice-president with JP Morgan Chase in London.

      Prior to joining JP Morgan, he traded gilts and sterling Eurobonds at ABN Amro Hoare Govett and Hambros Bank. He has lectured on the bond markets at International Faculty of Finance and London Guildhall University, and is a Fellow of the Centre for Mathematical Trading and Finance, City University Business School.

      Books

      The Bond and Money Markets, Butterworth-Heinemann, 2001

      Bond Market Securities, FT Prentice Hall, 2001

      Capital Market Instruments, FT Prentice Hall, 2001

      Investing in bonds

      The views, thoughts and opinions expressed in this article are those of the author in his individual capacity, and should not in any way be attributed to JP Morgan Chase, or to Moorad Choudhry as a representative, officer or employee of JP Morgan Chase.

      1. The oldest rule in the book: diversify. Always have bonds in your portfolio.

      Not all of your investments should be looking for the quick profit. That’s high risk, and therefore unnecessary. In a bull market you’re buying bonds at a lower relative price, but receiving a regular income (coupon) at a time when fewer and fewer equities pay dividends; when the stock market starts falling and we start the transformation to a bear market, your investment is exposed to less downside, and as interest rates start to fall you’ll also register capital gain.

      2. Go with the business cycle, not against it.

      Familiarise yourself with the interest rate cycle. Corporate debt spreads are at their lowest at the top of the business cycle - not the best time to buy. In reality its easier to discern a slowing down economy than a falling market. A better way of looking at this is as the ‘interest-rate cycle’. As interest rates start to fall and corporate debt spreads start to widen, the market entry point becomes clearer. What’s the consensus with the interest rate cycle? The UK’s Monetary Policy Committee has rarely, if ever, surprised the markets. So that means the market knows roughly

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