Your Money: Schools learn art of stock-market savvy

In a tricky business, doing your homework pays dividends, as the National Investment Programme showed. Abigail Montrose reports

Even if you don't have much experience, a sensible investment strategy can pay dividends as long as you do your homework, as the 1,600 schools which entered this year's National Investment Programme run by Proshare discovered. Many of them comfortably beat the stock market average by sticking to sensible basic strategies.

Each team had to come up with a plan for investing an imaginary pounds 20,000 on the stock market over a four-month period. Their portfolios had to include shares in a local company, a blue-chip firm and a multinational organisation.

Stock picking is a tricky business at the best of times, but a little knowledge can go a long way, as the team from Thornden School in Chandlers Ford Hampshire discovered. It decided which sectors it wanted to invest in and then researched individual companies looking for underpriced shares. The sectors were mainly volatile, which meant high short-term gains were possible.

"A lot of the pupils know about technology, computers and the Internet, so they decided to invest in these sectors," says Roger Scott, head of economics at Thornden. "They then looked for companies that looked as if they had products which were world beaters in their areas of expertise,"

By the end of the four months, Thornden's portfolio had increased by 70 per cent to pounds 34,040. Over the same period, the FTSE grew just 2.7 per cent to 3,644.

"One of the major lessons of investment is never invest in anything you don't understand. It's the simplicity of this strategy I like - there are clear reasons for each investment. You can't just choose sectors, you have to choose stocks, and they've done this," says John Hatherton, head of research at the investment house M&G.

Daniel Godfrey, marketing manager at Fleming Investment Trust Management, agrees with Mr Hatherton, but points out that many investors are looking for a less bumpy rise. "When you manage money on behalf of private investors or a pension fund, they don't want to see the fund double in value one month only to slip back the next," he says.

An alternative short-term strategy is to look for possible takeover targets. As speculation increases so does the price of the company's shares and there is the opportunity for quick returns. Bablake School in Coventry adopted this strategy, although they also looked for companies which had recently reported sales growth and so looked set to rise in value.

Within the four months, two of the companies they invested in, South West Electricity and Lloyds Chemists, had been taken over and their pounds 20,000 had been turned into pounds 27,198. In the short-term this approach can pay off, but over the long-term it can be a risky strategy, says Daniel Godfrey: "Focusing only on takeover targets is very volatile over the long-term. You need to sell the stock at just the right moment. In the short term you can do very well, but over the long-term it is essential not to stay emotionally attached to the belief that there is going to be a takeover. If there isn't and you hold on too long, you could lose everything you had gained," he says.

The eventual winner of the competition was a team from Queen Elizabeth's School in Ashbourne, Derbyshire. Its strategy was to identify shares which were priced around their lowest levels of the year. They then looked to see if the share prices were low for a particular reason or if they were just currently undervalued.

"We looked for shares which looked like they were on an overall upward trend," says team member Thomas Slade. By the end of the four months, the portfolio had risen 29 per cent to pounds 25,954.

"This shows the benefit of research. They identified cheap stock, looked at why it was low and the research paid off," says Mr Godfrey. Commenting on the three strategies, he said: "What this shows, is that no one strategy is best. But discipline and knowledge are always going to be a fundamental part of any successful strategy.

"While identifying takeover targets and stock picking shares in volatile sectors can provide good short-term gains, the reverse can also happen. Timing is a crucial factor and if you get it wrong you could see your investment slashed in value."

The school teams were, of course, playing with fantasy investments. They will also have been taught that investing directly in shares can be a risky business; private investors are usually advised not to do this unless they have a minimum of pounds 25,000 to invest in a portfolio of at least 12 shares.

"Equities should always be seen as a long-term investment. If you are only able to invest for a short period of time, you could find yourself having to sell up when share prices are going through a rough patch."