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is open knowledge, you can base your buy and sell decisions on the interest rate cycle. Contrast this with equities - its anybody’s guess where the buy or sell point is.

      3. Everyone should have a safe haven for a portion of their savings - hold government bonds like gilts.

      Gilts outperformed UK equities in 1998 and 1999, but with none of the risk of any of the equities in the FTSE 100. That’s a risk-reward combination that’s unbelievable and unmatchable. It almost invariably makes sense to place some funds with this kind of product irrespective of where the market or the business cycle is.

      4. Buy the downgrades, sell the upgrades.

      The market is usually marking down debt ahead of any formal announcement by the ratings agencies. But not all the news is priced in; after a downgrade the sharp sell-off signals a buying opportunity, as spreads have already widened considerably and widen still further. Similarly its too late to buy after the upgrade announcement, which implies a sell signal. But keep an eye on the interest rate cycle.

      5. Heed the credit rating, but look ahead of it.

      The formal credit rating is there for a reason, so heed it. But consider the statistical probabilities. A BBB- or BB-rated company has more upside potential, statistically speaking, than an AA-rated company, which is unlikely to go much higher. So with the higher-rated company you’re looking at smaller capital gain potential.

      6. The current yield spread is telling you something - heed it.

      Very wide spreads are there for a reason. So if you’re holding the debt, sell it. If you’re not, look at buying it. Check where the equity is trading: how is it viewed? But go with the fundamentals, not media fad.

      7. Don’t hold corporate debt if you don’t like the corporate equity.

      Simple psychology of the self: if you don’t like the company full-stop, you’re not going to like the company’s debt, and you won’t feel happy holding it.

      8. Don’t invest going into important announcements.

      Markets are unpredictable. We know that. So don’t make it any harder for yourself by buying, or indeed selling, just before an important announcement such as an FOMC meeting. Sit on your hands until after the announcement and then plan accordingly.

      9. Corporate bond prices are good bell-weathers of corporate health generally. Use them as a guide for all your investment decisions.

      Bond market analysts will tell you that, unlike equities, the bond market is a proper market. A greater fall in a company’s bond price relative to other debt of the same sector, is a good indicator of the falling positive perception of the company’s overall health and financial well-being.

      10. Look at established names in a slowing economy or recession.

      Corporate debt spreads widen in a slowing economy or recession. However established names (such as FTSE 100 companies, etc) are often viewed positively as the economy starts to recover, and their debt is a strong contender for upside growth as the economy starts to grow again. Consider buying into the market at this point.

      11. When interest rates are historically high, buy bonds.

      Check recent history. If interest rates are at historically high levels (go back say, three or five years), that means they will be going down at some point. It might be next week or next year, but they are going down. Jump on board now, sit back with your coupon income, and wait. A capital gain is a certainty. Especially with new issues.

      12. Don’t look for the bottom of the market, or for that matter the top.

      It’s very difficult to pick the bottom of any falling market. Look at the business cycle and interest rate cycle, and go with it. If you’ve lost confidence in your holding, sell it.

      My one regret: Not joining Giles Fitzpatrick’s equity sales team at Hoare Govett Securities Ltd in 1993, after being offered a job by him.

      ‘Be sceptical of track records. There are so many funds and forecasts that at any point in time, someone has to have been right. With enough monkeys in the room, one of them will type out Hamlet. But it doesn’t mean the same monkey will then go on to write Macbeth.’

      Paul Ormerod

      Robert Cole

      Robert Cole is editor of the Tempus investment column in The Times newspaper. The column analyses UK companies and their share prices, and addresses investment themes relevant to industrial sectors and overseas stock markets.

      Robert contributes to a variety of other financial media, including the web site www.equityeducation.com, and also lectures in financial journalism at The City University on a part time basis.

      Books

      Getting Started in Unit and Investment Trusts, John Wiley, 1997

      The Tempus ten golden rules

      1. Hail the herd.

      Share prices rise when there are more buyers than sellers. They fall when sellers outnumber buyers. The consensus view is not always right but the actions of many usually tell a stronger story than an individual view. However, the best investment profits go to those who anticipate change and that means investors often need to swim against the tide.

      2. Valuation, valuation, valuation.

      If the three important things about retailing are location, location and location, the three important things about equity investment are valuation, valuation and valuation.

      Value a share price in at least three ways: by reference to the underlying assets, the company’s profitability, and the dividend income. In addition, there should be a close relationship between the price of a share and the total value of its future earnings, discounted to allow for the fact that money promised is worth less than money possessed. So undertake discounted cash flow calculations.

      Do not confuse the strength of a company with value of a share. Shares in good companies are not always worth buying. It all depends on price.

      3. The sentimental journey.

      Share prices do move for reasons other than those dictated by the laws of fundamental valuation. Swings in investors’ perceptions of value, or sentiment, can be as powerful as any fundamental strength. Share prices can also move because money chases particular stocks for technical reasons. Many large investors choose to structure their share portfolios to mirror the membership of a stock market index, such as the FTSE 100. Changes to the membership list of indices can influence share prices as investors buy or sell in volume.

      4. On time.

      Stock market history suggest that the reliable returns are generated by long term investors - those who invest for five years or more. However, the performance benchmarks that underpin faith in the reliability of rising share prices measure, largely, success stories. Failures can harm individual portfolios in a way which is minimised by the stock market indices. Remember also that the long term is made up from a series of short terms joined together. Get short term decisions right and the long term performance will be enhanced.

      5. Hedge your bets.

      Never underestimate investment

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