This not only helps explain my keen interest in economics and the market-sensitive macro views you have been reading in this column over the past decade, but, having been taught how to rip through a set of company accounts, I was given a head start when it comes to investment analysis, too. But being able to analyse a company's accounts is one thing; being able to decide whether shares in a company are a good investment is a different matter entirely. So to improve the chances of screening out the best investment opportunities, I go through a methodical process on every company I research in order to have the best possible chance of making a profitable trade. This includes anticipating what company-specific newsflow is set to be released over the coming months and calculating the likely implications for the share price.
I also look at industry drivers to see whether there could be any read-across for a particular company. A good example is my advice to buy shares in chip designer Imagination Technologies ('Tech calling', 9 Aug 2012), which was ideally placed to ride off the coat tails of a tech market rally and had the benefit of the launch of the iPhone 5 to spark investor interest, too. It's a trade that has done incredibly well, with Imagination's share price rising from 538p to 626p in the past four weeks. It was no fluke, either, as I used another one of my favourite investment techniques to further mitigate risk: focus on shares that are close to registering a major chart breakout or have already done so.
In the case of Imagination, the share price had been capped at 520p for months on end, but interestingly had been forming a base formation. So the odds were pretty short that any breach of this key resistance level would unleash pent-up investor demand and create the momentum needed to hit my target price. It's worth noting, too, that I placed a tight stop-loss of 510p to protect my capital just in case the breakout proved to be a fake-out. Minimising losses when a trade goes wrong is a key discipline and one that is probably the hardest to practise. Which brings me to another important discipline I try to adhere to: don't be greedy when taking profits. So, with Imagination's share price now in my target price range of 620p to 640p, I am banking profits as a 16 per cent return in a month is good enough for me.
Economic watch
When it comes to making major market calls I always keep a close eye on the macro environment on both sides of the Atlantic in order to gauge investor sentiment. A really good example of how this works in practice is the positive reaction of equity market investors to last month's news that president Mario Draghi would do "whatever it takes" to preserve the euro ('Benefit from the bond bazooka', 14 Aug 2012). My take was that a massive ECB bond buying programme to cap the sovereign bond yields of Spain and Italy was in the offing and one that would prompt a multi-week risk-on rally. Therefore, ahead of the official news being announced, I advised buying into the US tech sector in mid-August since any cut in the risk premium embedded in equity valuations (reflecting a lower probability of a break-up of the single currency) would produce the best returns on a risk-adjusted basis in the segment of the market where the hot money flows to first.
In the circumstances, and reflecting a highly significant triple-top breakout on the Nasdaq 100 chart at 2680, I advised buying an RBS covered call warrant on the index, RK28 (http://ukmarkets.rbs.com). My target was a new bull market high above 2795 and I placed a stop-loss on the trade of a close below 2650. Not that there was any risk of that stop-loss being triggered as the Nasdaq 100 has surged to a new high of 2825 at the time of writing. And, because I geared up my capital - RK28 is geared 13 times to moves in the underlying index - the price of the call warrant has soared 50 per cent from an advised buy-in price of 96p to 144p. If you followed my advice, I would run your bumper profits.
This was not an isolated example, either, as the combination of the ECB bond buying programme, officially announced on 6 September, and a key note speech from US Federal Reserve chairman Ben Bernanke at Jackson Hole on 31 Aug, has put a rocket under the precious metal complex as I had predicted ('Golden opportunity with a silver lining', 22 Aug). In fact, gold and silver prices have surged by over 4 per cent and 12 per cent, respectively, in the past three weeks.
The important point is that by adhering to a systematic and disciplined approach to investment analysis and factoring in key variables when making investment decisions, we can mitigate risk and significantly increase the chance of delivering profitable outcomes. It's also an approach that has served me well for the past quarter of a century.
