The Modern Investor's Manifesto, Part II

"I don't know what to say. I've been investing since January and I've never seen anything like it." 

 - Unnamed Hong Kong housewife during the Asian financial crisis of 1997/8

1. For many investors, capital preservation in real terms should be more important than capital growth in notional ones.

2. Money illusion is encouraged by venal, inflationist governments.

3. For the wealthy, "the practical utility of any gain in portfolio value inversely relates to the size of the portfolio".

4. In plainer English, the more significant your investible asset base, the less aggressive you should be in the pursuit of growing it. 

5. Investors – as humans – are typically loss-averse. We feel the emotional impact of equivalent gains and losses disproportionately. This does not mean we should avoid considered risks. 

6. Investing dispassionately is difficult when most of the investment media comprise the participants in a 24/7 circus. If the business of investing is either entertaining or exciting, you're doing it wrong. 

7. The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty of investors already have.) 

8. True diversification remains the last free lunch in finance. 

9. Having fatally tainted monetary policy, the dismal science of economics has wrought damage across investment theory as well: 'homo economicus' does not actually exist, and markets will never be wholly efficient until all people are, too.

10. "The investor's chief problem – and even his worst enemy – is likely to be himself." (Ben Graham)

11. The pursuit of sensible and successful investment is part art, part science. The business of investing is simple, but not easy.

12. The general principles are not arcane. They should begin with the avoidance of loss. 

13. Starting valuation is the most important characteristic of any investment. 

14. Risk is poorly defined as volatility. It is better defined as the possibility of a permanent loss of capital. 

15. "Operations for profit should be based not on optimism but on arithmetic." (Ben Graham again)

16. Don't buy poor quality investments pushed by sell-side interests; don't overpay for quality investments.

17. The 'equity / bond / property / cash' paradigm struggles fundamentally in an environment where all of these asset classes appear overvalued. 

18. Indexation and benchmarking are anathema to successful investing. 

19. Contrarianism is easy to discuss but astonishingly difficult to practise. 

20. The only benchmark appropriate to the private investor is cash. Relative returns cannot be taken to the bank, especially when they are negative. 

21. 'Beating the market' is a questionable pursuit, and most who attempt it are predestined to fail. Sensibly assessing a relevant personal objective is more important. 

22. Friends are unlikely to share their worst investment outcomes at the golf club. 

23. Most investors overtrade. Most successful investors do not. 

24. Liquidity is overrated. For capital that can be safely committed to the longer term, it is irrelevant.

25. "In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand." (and Graham again)

26. Private investors are often poorly served by the asset management industry. 

27. The asset management industry appears to have become detached from its original objective and 'source code' – assuming it ever had one. 

28. The medical profession has the Hippocratic Oath: first, do no wrong. The asset management profession lacks such an explicit expression of fiduciary commitment to its clients. 

29. The larger the fund management organisation – whether by assets or by staff – the larger the likely number of conflicts of interest. 

30. Banks have no place peddling investment products to their private clients. They've done enough damage to the economy already. 

31. The asset management industry is overpopulated by 'product'. 

32. Once a fund management company's fund range grows materially higher than one, it may be legitimate to ask precisely what is specialises in, or stands for. 

33. Collective investment funds are, akin to insurance products, as often "sold" as "bought". 

34. The asset management industry is not exactly short of economic agents. 

35. Economic agency risk – the lack of skin in the game – must account for some of the mispricings and bubbles within financial markets. 

36. Sometimes incredible investment opportunities arise in the form of anomalies between current valuation and prospects for subsequent return. These opportunities are unlikely to be identified by fund managers slavishly tracking a benchmark or index. 

37. Given a choice between an economic agent and an asset manager meaningfully invested within his area of expertise, it is probably best to favour the latter. Investors may prefer to work with managers who eat their own cooking. 

38. Private investors may, all things being equal, be better served by small, unlisted, private partnerships than by global, publicly listed, full service investment brands. 

39. An asset manager cannot be all things to all people; it may be better not to try. 

40. Asset managers may sometimes be better off in the long run by refusing business than accepting clients nursing incompatible objectives, aspirations or attitudes. 

41. Rising compliance and regulatory pressure reduce variety in the asset management business. This is unlikely to be in the best interests of private investors. 

42. Every asset manager ultimately faces a decision: to remain an asset manager, or to become an asset-gatherer. They are not the same thing. They are polar opposites. 

43. The more intermediaries and interest groups between the client and the investment 'product', the more mouths that need to be fed, and the greater the fee slippage that the client will incur. 

44. Private investors should be more interested in identifying principled managers with a definable and repeatable process, than focusing on short term returns, and rotating between managers. 

45. All things being equal, higher fees equate to lower returns. 

46. This does not imply that low fee products are automatically appropriate. Why pay modest fees to ensure that one's capital declines precisely in line with an index? 

47. While there is a place for performance fees in niche investment areas with finite capacity, investors are generally poorly served by paying performance fees, especially in mature and more efficient markets. 

48. "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money." (Warren Buffett)

49. Asset managers are only human. Good managers sometimes perform badly. No financial asset or investment necessarily sees its price and value rise in a straight line. Provided the asset manager is clearly and consistently following a pre-agreed process and investment philosophy, the end investor should have no cause for complaint. "Periods of excruciating short-term underperformance are a burden that all genuine value investors have to endure." (Jonathan Davis)

50. When interest rates are close to all-time lows, the printing presses are running and a gale of financial repression is blowing, the merits of 'deep value' but profitable well-managed, listed businesses seem more than usually compelling – compared to just about any other asset or asset class.

51. Distrust anybody who claims to have all the answers. Especially today.