Do you invest for your kids? If so, does their return beat yours?
My two daughters' investment returns continually beat my own hands down.
During the summer sell off, they lost only about 5% despite being fully invested at the start of July.
They first started investing in earnest following a bit of a windfall when the eldest one was selected for a Persil TV ad in 2006. They've managed to almost triple the money earned back then. They'll both need the money in less than a decade if they decide to go on to higher education, so it's good that the fund is doing so well.
So how do they achieve this kind of return?
It's quite straightforward really; they buy conspicuous value and are patient. They don't overtrade. They buy for yield, as well as value, and don't get their heads turned by exciting small caps on the verge of a big future that never comes to pass.
They're content not to buy at the absolute bottom, nor to try and time the absolute top. And they take the profit when the clear value has been outed. They diversify well, but hold sufficiently few shares that it's not impossible to whip the market.
They never buy shares where one person or a couple of people acting in concert have complete control. But they do like the directors to have a meaningful stake in the business.
And they aren't afraid to take a loss on the chin, when an investment story doesn't pan out as well as anticipated.
For such a simple and relatively boring strategy, the returns are amazing. But there are times when they're quite bold. And they aren't scared of investing in very small caps and AIM-listed companies when there's clear value to be had, even in the absence of dividends.
For example, the biggest single gain came last year with Nautical Petroleum (LSE: NPE), buying around the 40p mark, and selling after it quadrupled (much too early as it turned out).
A good example of a big cap trade was Royal Dutch Shell (LSE: RDSB) which they bought into in the summer of 2010. At this time, Shell shares were adversely affected by an unfair "read across" from BP's Gulf of Mexico disaster.
They bought the shares in July at £15.70, exiting in January at £21.30 and picking up over 50p in dividends along the way.
A recent mistake, so far anyway, was to go into Sainsbury (LSE: SBRY) around £3 -- a little too early as it turned out. I suspect it won't be too long before they're in profit, but even if not, the shares should return 80% or so over the next decade via compounding the dividends.
They aren't perfect investors by any means. They make mistakes as we all do. They're just a lot better than me.
Of course, they're blissfully unaware of how well they're doing and are content with a fiver a week each in pocket money for the time being.
The moral of this story
The point is; their returns are better than mine because I make shrewder, more balanced decisions on their behalves than I do for myself. The tortoise generally does beat the hare.
So what's the moral of this story? Well for me, it's that I should invest on my own behalf as carefully as I do for my daughters.
The problem is that it's easy to give yourself this kind of advice when markets are as bearish as they've been of late.
When you're making money hand over fist, it's harder to be as disciplined. Nevertheless, I resolve henceforth to invest as carefully on my own behalf as I do for the girls.
Six point checklist
I may need a hypnotist to make a reality out of this resolution. But a checklist should help. This will be pinned to my computer and tattooed onto the back of my hand, as follows:
1. Invest with a ten-year horizon.
2. If in any doubt, leave it completely out!
3. Invest mainly for income, whilst simultaneously investing for value.
4. Look for a margin of safety.
5. Be patient -- resist the urge to do something.
6. Listen to ideas, use others' analysis, but be completely independently minded; trust your instincts, whilst also trying to take the emotion out of decisions.
More from David Holding:
> David owns shares in Royal Dutch Shell and Sainsbury.