INVESTMENTS

For those willing to take a long-term view, there is nothing to beat buying shares in consistent money-spinners that have the capacity to pay handsome dividends
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This has been such a good year for investors that talk of Christmas presents is probably redundant. Anybody who has been fully invested in the stock market this year will have good cause to be pleased with the outcome, and the latest interest rate cut - the first of several to come - will do no harm either. Those who played the US stock market, which is up more than 30 per cent, have done best of all. It has certainly borne out the wisdom of two old Wall Street rules of thumbs: markets always do well in years ending in the number five; and they always prosper in years preceding Presidential elections. Who said investing in the stock market was difficult?

Certainly not a remarkable lady called Anne Scheiber, whose exploits in the stock market have just come to light. For those of you who may have missed the story, this is the lady who spent her working life as a tax clerk in the Internal Revenue Service (the American equivalent of our Inland Revenue) and who took up investing only in her fifties. Armed only with her meagre income, and despite being completely untutored in the finer arts of investment, Miss Scheiber was so successful at investing her modest spinster's mite that when she died earlier this year at the age of 101, she had turned her initial savings of $5,000 into a fortune worth no less than $22m. Her dividend income alone came to $750,000 a year by the time of her death, completely dwarfing anything she had earned in her working life.

It is a remarkable story from which one can draw several morals. One is the obvious one that so-called experts have no prerogative on wisdom when it comes to investing in the stock market. Common sense and application can take you a long way. In Miss Scheiber's case, her success stemmed from following some simple rules - investing in a limited number of well established companies that have a strong business franchise and the ability to generate significant amounts of cash now. Her biggest holdings were in proven cashgenerators such as Coca-Cola and the drugs company Bristol- Meyers Squibb.

A second, related, moral is that it pays to be patient. Putting money into smaller, more speculative companies will often generate bigger returns in the short run, but for those willing to take a long-term view, there is nothing to beat buying shares in consistent money-spinners that have the capacity to pay handsome dividends. The returns over time can be just as big, and the risks are much reduced, particularly if you have personal knowledge of the company and what it does.

Just as important - and often neglected - is the simple power of compound interest. One of the great advantages that Miss Scheiber had over other ordinary investors was simply that she lived so long. Even doing nothing with your portfolio can make you a lot of money provided you reinvest the income and then hang around long enough to let the power of compounding work its magic.

A simple example underlines the point. Suppose you have pounds 10,000 in capital, and put it into shares that grow on average by 7 per cent a year and yield 4 per cent - not unreasonable assumptions. Ignoring taxes for a moment, the initial sum will have grown to pounds 50,121 within 10 years, pounds 269,323 in 20 years and pounds 1,372,956 in 30 years - all without you doing anything about it. Even allowing for tax, the cumulative gains on both capital and reinvested income can be enormous.

And there is one other great advantage that comes if you do not, as Miss Scheiber apparently did not, trade your shares actively. This is that the main tax liability - the tax on the capital gain - does not arise until you sell them. The sum that can compound by not trading your shares is therefore much greater than if you sold the shares each year and bought different ones. In one year the difference may be small, but over time the benefits of keeping the taxman's hands off your capital can literally run into thousands or even millions of pounds.

Nobody knows exactly how Miss Scheiber planned her investments. She was, by all accounts, a secretive and lonely lady whose wealth brought her little happiness - one moral which certainly needs no reinforcement. But it is tempting to think that an insight into the importance of tax was at the heart of her remarkable story. Having worked as a tax officer, nobody knew better than her the impact that it can have on your wealth.

At least one commentator has noted the similarity between the methods of Miss Scheiber and those of Warren Buffett, the much more famous professional American investor. All the morals you can draw from the spinster's case are ones to which Mr Buffett himself has drawn attention - and to which he himself subscribes. Buy shares in good companies when they look cheap. Hold them for a long time. Don't overtrade. And do all you can to avoid tax. These are Mr Buffett's methods in a nutshell.

They are described at great length in one of the three books published this year, which I suggest that anyone with a serious interest in investment should consider for a Christmas present. The three titles are quite different in style and content, but all come highly recommended. The three are:

r The Warren Buffett Way, by Robert Hagstrom, Jr. John Wiley & Sons. pounds 11.99. An exhaustive summary of everything that the world's most famous investor has said and written about the art of investment, complete with detailed explanations of why he bought his most successful shareholdings. Hard going, and not for beginners, but full of good meat;

r The Craft of Investing by John Train. Harper Business. John Train is a New York investment counsellor and author, who among other things now writes a regular column for the Financial Times. Light and easy to read, but full of wise words and advice. Particularly good on market cycles and the dangers of following fashion;

r The Schwartz Stock Market Handbook by David Schwartz. Burleigh Publishing. pounds 17.95. Call 01453-731173 for information. A fascinating account of historical trends in the UK and US stock markets, showing how shares have performed in each month of the year. Academics and efficient market theorists may be sniffy about the value of such historical evidence, but then who would ever believe that the rule about Wall Street and years ending in five would keep coming up?

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