Should I use 'scuttlebutt'?

"Then there were the bottom up investments, like Domino's Pizza. I know they are growing, I know it's a superb product, sold far too expensively, but all my friends agree it's worth paying £15 for, because the ingredients are better. Restaurant Group's restaurants are always full, the operation slick and I know their brands are very good."

Mr Harper says that while he "got lucky" with WCC, he's noticed that he's done much better with 'scuttlebutt' shares where he's got first-hand experience of the company. "I was very close to selling Tesco, having witnessed terrible customer services at branches all over the place. Lo and behold, their share price falls."

As a result, he's wondering if a change of strategy is called for. "I think it would be wiser to have big stakes in maybe half a dozen companies and to follow their fortunes carefully, rather than to have many different random ideas, and watch the baskets closely." For other exposure, he would use funds and investment trusts.

Steve Harper's main holdings

Steve Harper's Sipp holdings

Notes:1.33HK$ = £0.11 and $593.06 = £378.49 Source: Dollars2pounds.com

Price and value as at 20 July 2012

Chris Dillow, Investors Chronicle's economist says:

There are many things to like about your approach to investing. For one thing, I like the fact that you're recognising that your human capital - your earning power - is part of your investment portfolio, and that you're holding cash to protect yourself against the risks to this asset. It's also good - for a brief while at least - to have cash ready to invest in equities when the opportunity arises.

I also like your recognition that your individual equity holdings should be concentrated in a few stocks. This avoids costly over-diversification, and recognises that even the best stock-pickers have only a few good ideas. Holding (a few) funds should give you what diversification you need.

Third, I applaud your interest in investment trusts. One of the great things about these is that their discount to net asset value (NAV) can sometimes be a sign that they are genuinely cheap. This is because such discounts increase as investors' sentiment deteriorates, and so a wide discount - relative to the trust's own historic discount - can sometimes be a sign that the trust is under-priced. There are few good 'buy' signals in stock markets. Discounts might be one of them.

There are, however, some things I'm not so keen upon. One is your desire to invest in what you know or can observe. This is a very common motive, but it is often mistaken. As our knowledge grows, our confidence tends to grow even more, with the result that we can over-invest in what is not really knowledge at all. Researchers in Norway have found that this is just what investors tend to do. People tend to invest in shares in the industry they work in, in the belief that they know the companies, but such investments tend to underperform the market.

You give the example of seeing poor customer service in Tesco and thinking it a sell signal. I fear there are two errors here. One is the "after it, therefore because of it" fallacy. Customer service is not necessarily a good predictor of returns. Ocado has great customer service but terrible share price performance, whereas Ryanair treats its customers like cattle but has been very successful. The other error is a self-serving memory bias. We tend to remember our good ideas and forget our bad (or blame others for them) with the result that we get too rosy an idea of our merits.

The question to ask is not: "what stocks do I know?" but rather: "what do I know that other investors do not?"

In this context, I'd be wary of buying funds on the grounds that their managers know what they are doing. Fund managers can have some good ideas, but there's a positive danger in investing in managers' knowledge. It can lead us to chase returns; we can buy past good performing funds in the belief that the manager has ability, only to find that subsequent returns are poor.

The case for buying funds is that they give you exposure to market segments - be it China, recovery stocks, small caps or just equities generally. Please don't overlook the virtues of plain tracker funds.

There is, though, a danger in funds. In investing in many stocks, they greatly diminish the risk of falls in individual shares but this comes at a price of increasing your exposure to the market generally. Almost all general equity funds rise and fall as the global stock market rises and falls, and even small baskets of funds are likely to do so.

Now, as you say, we cannot time the market - though remember the power of seasonal investing - and there is little point trying. But this is no reason to stay out.

Which brings me to one piece of advice. If you make regular contributions to a pension fund you can take advantage of pound/cost averaging and automatically buy more shares when they are cheap.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers says:

With 10 years experience, you have come a long way. Importantly, you are learning from mistakes, honing and refining strategy. We congratulate you for already having started a pension - the younger you start the better - and would encourage you to also make a will and consider arrangements to minimise tax such as the use of individual savings accounts (Isas). You may already have done these things.

Rule number one in the world of investment - not to lose money - underlies all mistakes made by investors. Unfortunately, the majority of investors start with the goal of achieving high returns and neglect this basic principle. It's good that you are considering your investment 'system' carefully, but do remember that investment is an art, not a science. There is no set formula or strategy guaranteed to work.

The 'core and satellite' approach you are advocating makes sense. For many investors, funds can provide the core building blocks of a portfolio.

Among your existing investments, Cazenoze UK Smaller Companies provides diversified exposure to this potential long-term growth sector. The fund could be used to further diversify a basket of core global equity funds - we particularly like the JM Finn Global Opportunities or the Rathbone Global Opportunities funds. The Scottish Mortgage Investment Trust on your watchlist is another one to consider. You might also want to look at more specialist sector funds such as the Invesco Perputual Corporate bond fund.

Funds also lend themselves to of pound cost averaging, which I notice Chris has recommended. Doing this allows you to buy more units when they are cheap and avoids the temptation to try and time the market.

The idea of using personal experience to influence investment decisions was first proposed in the late 1950s by Philip Fisher, a godfather of value investing. He called it "scuttlebutt", which is naval slang for rumour or gossip - the scuttlebutt was the water barrel on a ship where sailors would discuss day-to-day life. Peter Lynch, a legendary fund manager at Fidelity, was also a fond user of the method.

As for individual shares currently held, a number of companies such as Vodafone, recently acquired and currently favoured by analysts (consensus view: buy), may already fit your new own knowledge criteria. Furthermore, overtime, individual shares held should be adjusted in favour of the new strategy.

In all while you - like just about all investors - have made mistakes, experience, discipline and a firm new strategy should help you progress.