Diary Of A Private Investor: Readers help me look into the future

It's a pleasure when people tell me when I'm right and where they think I've gone wrong. But there are a few basic rules to follow

One of the pleasures of writing this diary is that it generates a flow of e-mails from fellow investors. Whether they agree or otherwise with my advice and suggestions, they do stimulate debate and often contain ideas and perspectives that assist my approach to investing. Much of the information is worth passing on, so once in a while I give the column over to readers.

Gratifyingly, Dr Bob Drake of Swansea enjoys my "weekly dose of good sense" to the extent that he keeps the articles for reference. "The solid advice you have given in recent weeks and months gives comfort even in a bear market," he writes. In constructing his own portfolio he has followed my guiding principles:

1. Invest for the medium to long term, 2005 to 2009, not the next two years.

2. Buy into sustained growth and profits. The fittest companies can weather recessions.

3. Watch the p/e ratio and yield. A p/e of only five or seven may suggest a share is already cheap and there isn't much downside.

"I would add one further thought," Dr Drake says. "People eat and talk even in a recession. My food company shares are holding up well. And don't give up on telecoms just yet (you warned that inexperienced investors sell just when the share price is reaching its bottom and thus they lose out in a big way).

"By 2008 I would not be surprised to see my BT and Vodafone shares doing rather well, reaping the rewards (albeit long awaited) of genuine 3G phones. At the very least the wait is worth the risk."

Dr Drake concludes by questioning my belief that the future for Marconi is black. He points out that the company still produces quality equipment that will be in demand by the telecoms industry.

He is probably right, and if anyone can turn the fortunes of this company round, the new chairman Derek Bonham is the man to do it. But these are troubled times and if the banks decide to pull the plug on Marconi its future could be very short-term.

Sydney Schofield, who e-mails from Minchinghampton, takes me to task for suggesting that private investors should batten down the hatches and wait for the stock market tide to turn. "I could not disagree more," he says. "This is the time to buy. The economic climate has created an over-reaction both here and in America. Good shares are grossly undervalued.

"You are always advising us to acquire businesses, not markets, so why not buy when prices are low? I spend ages doing research on companies I think might fit my portfolio and when I make a decision I intend to keep the shares for a long time. To use your words, I intend to hang on to them 'until the story changes'. So, if I identify a winner and the price is at a low for the year, why should I hold back?

"Any fool can buy a good company when prices are high, but he is not going to get rich if he buys only at the top of the market. And I am not a believer in waiting until prices start to climb because it happens so quickly I usually end up missing the boat."

I am not going to argue with you, Sydney. In fact, I applaud your philosophy, particularly the emphasis on painstaking research and long-term investing. They must be at the heart of every successful investor's beliefs.

But, while I would never advocate trying to beat the fickle and unpredictable market movements, I don't believe we can afford to ignore the domestic and world economies. They can and do have a considerable effect on most businesses.

A couple of years ago, you may have been confident that your pension provisions were adequate. Do you feel the same today? I do not, and as bus-pass day approaches I deem it necessary to look at dividend yield as well as capital growth when I consider an investment. The future for us all is now less secure and predictable. I believe we should adjust our financial balances to suit the new circumstances.

I try to avoid tipping specific shares, but I do occasionally publicise my own purchases in the diary and Shirley Scott, at her peril, follows my lead. Thus, in January she bought Taylor Woodrow at 171p and a month later McCarthy and Stone at 265p. "You obviously have a thing about builders," says her e-mail. "But these constructors don't seem to be going anywhere. Have you still got your holdings in them? And would you advise me to sell mine?"

Yes and no, Shirley. Yes, I still have my shares in both companies and no, I would not advise you to sell yours. If ever there was a sector that was undervalued, it is construction and building materials. Take a glance down the price-earnings column in your newspaper. The price-to-earnings ratio compares the price you have to pay for a share to the amount of distributable profit available per share. I'm not sure of the market's average p/e but anything below 15 is certainly worth looking at. Many of the builders' p/e rates are below 10, most of them below 12.

Yet in a world awash with talk of recession and depression, where is demand forcing prices up? Housing. Month in, month out, the building society surveys show house prices rising. Most of the big builders have substantial land banks and it is not unusual for a new estate to be sold out before a brick is laid.

Company profits earnings are increasing, positive statements are being made at annual meetings, buy recommendations abound among brokers' analysts, yet share prices remain relatively low. It cannot continue. Share prices should and will rise in this sector. I hope.

terry.bond@hemscott.net