Just for the record

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The Independent Online
A serious investor should keep two small books: one to enter details of all share purchases and sales, and the other to record major points of interest concerning investment principles, methods and approaches.

The first book is a routine idea. Even for completing your tax return, a detailed note is invaluable. An important additional point is to record the level of the appropriate index at the time of each purchase and sale. Unless you confine your investments to FT-SE 100 stocks or the leading 350 shares, the FT Actuaries All-Share Index is the best measure of general market performance. The index operates without cost, and stragglers are chopped out, so it is not easy to beat consistently by a wide margin.

Of course, there is no need to base your calculations on individual stocks. If your portfolio is almost fully invested at the beginning of the year, you simply need to check the index level then and compare the performance every three months or so with that of your portfolio. It is important to do this, as otherwise you might preen yourself because of a 20 per cent gain, while the market as a whole could have doubled during the same period.

A regular detailed comparison of your portfolio's performance against the market will help you to face the facts. After you have been investing for a few years, if you find that you are not beating the index you should consider switching to a unit trust such as a tracker fund.

The second book is a new idea of mine. I have heard hundreds of good jokes over the years, but can only ever remember one or two. I often wish I had made a note of the best ones. In a similar way, I am often very impressed by a few words in an investment book and I have now taken to writing them down at the time. I have found this a great help in building and refining my own method of investment.

For example, in Beating the Street by Peter Lynch I particularly liked his comments: 'If you cannot find any companies that you think are attractive, put your money in the bank until you discover some,' and 'The biggest losses in stocks are from companies with poor balance sheets.' In his earlier book, One up on the Street, I made a note of '. . . the perfectly simple business ought to have a perfectly boring name. The more boring it is the better.' In Jack Schwager's book Market Wizards, I like one of the main points in his summary of the common denominators of the styles of great investors and traders. 'In a variety of ways, many of them stress the importance of having the patience to wait for the right trading opportunity to present itself.' Very similar to Lynch's point about keeping your money in the bank meanwhile.

In my book The Zulu Principle I make a large number of recommendations too. I like to think that one you will make a special note of is the importance of the price earnings growth factor (the prospective p/e ratio divided by the future growth rate) for measuring how much you have to pay for the future growth of a share and whether it is cheap or dear compared with the average growth share.

Obviously, this second book of yours should not be confined to points made in investment books. There are plenty of excellent reflective articles in the press and in brokers' circulars. I believe that making a detailed note of the most penetrating observations will help you to keep them firmly in mind.

Reading over all of the points from time to time helps to build and improve your investment discipline, which reminds me that in Schwager's more recent book, The New Market Wizards, 'discipline' was the word most frequently used by all the exceptional investors and traders he interviewed.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. He has agreed not to deal in a share within six weeks before and after any mention in this column.

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