Martin Spring: Best Ways to Profit in Shares

Martin Spring, who runs an independent financial market outlook, is one of my favorite analysts. This week, Mr. Spring gives us some tips on how to outperform the market, quoting Mr. Spring (emphasis mine):

``If the history of the past century is precedent for the future, the best investment strategies are these:

• Invest in shares with high dividend yields. According to a study of Britain’s 100 largest companies by ABN-Amro’s Global Investment Returns Yearbook (GIRY), over the 1900-2004 period high-yielders outperformed low-yielders by an average of 3.3 per cent a year. That may not sound much, but because of the wonder of compound interest, it would have meant £1 invested in high-yielders would have grown to £69,208 over the period – compared to just £2,963 for the low-yielders.
• Reinvest dividends, using other sources if you need income. According to the same study, such reinvestment would have boosted total return in US equities over the same period from 5.1 to 9.8 per cent a year, turning $1 into $17,545, compared to a mere $194 if dividends were not reinvested.
• Avoid the “blue chips” and invest in the smallest listed companies. In the UK, over the period 1955-2004, investment in small-caps (those in the lowest tenth by market capitalization), with dividends reinvested, would have outperformed the whole-market average by three times; investment in micro-caps (those in the lowest 1 per cent by market cap.) would have grown to a figure more than five times larger than for the small-caps.
• Invest in equities rather than bonds – but only if you have the endurance to stay invested through the bear markets. Over the past century, according to the ABN-Amro study, the global real return from equities averaged 5.7 per cent a year, compared to only 1.7 per cent for bonds. But “even in a lower volatility market such as the UK, losses (in equities) can be huge,” it warns. In the 1973-74 bear market, shares lost 71 per cent of their value in real terms.
• Focus your investment on resource-rich countries, while avoiding those that could be involved in armed conflict on their territory. Over the 1900-2004 period, the countries that delivered the best real returns from equities were Australia and Sweden (both averaging 7.6 per cent a year in real terms), South Africa (7 per cent), the US (6.6 per cent) and Canada (6.1 per cent).