COMMENT
100 Secret Investment Strategies

By Ed Bowsher (TMFArkle)
November 22, 2005

Richard Farleigh's life is a true rags to riches story. As a little boy he travelled round Australia with ten siblings as his alcoholic father looked for work.

Taken into care, Farleigh lost contact with all members of his birth family; yet he became a hedge fund manager in Bermuda aged 31, and "retired" to Monaco aged 34. Since the mid-90s he has invested in a wide range of smaller companies, both quoted and unquoted. He backed IP2IPO (LSE: IPO) and Arc International (LSE: ARK) long before they successfully floated.

In his new book,"Taming the Lion", Farleigh outlines 100 "secret strategies" that he says have made him rich.

Some of them aren't really strategies; more like axioms. But they're all interesting.

Here are my five favourites:

1. Fear the market

Farleigh lost four thousand Australian dollars in a few months when he started trading in 1984. He was earning less than twenty thousand dollars a year at that time. His mistakes included starting with positions that were way too big plus stopping and starting a new strategy every few days.

Since that time, Farleigh says he has never forgotten that the market can inflict serious pain on an investor. He counsels:

"Be like a lion tamer. The lion can be tamed, but only by maintaining a healthy fear of the lion."

2. The quality of a company's management is by far the most crucial factor in determining its success.

"Good management will find a way to make their product work, while poor management can mess up good products."

Farleigh claims that many survivors of the technology crash didn't have the best product in their niche. The survivors made it because they had good managers who carefully husbanded cash. That meant their businesses were still around when the good times returned.

3. Look for the next Big Thing

If you want to make big money, try looking for a big idea. Farleigh spotted that interest rates were beginning to rise in the late 80s and profited from that rise right through to the early 90s. He then bought lots of technology shares in the mid-90s as economies recovered from recessions and inflation stayed benign.

Farleigh continues: "the beauty of big ideas is that you often have plenty of time to get involved."

Markets take time to respond to structural changes, and you'll often see price trends develop, which you can then use as signals to invest.

Farleigh thinks the next big things could include nanotechnology - the science of very small particles - and the relative decline of the European economy.

4. Prices go further than expected

Stick with winners.

"You will find that long after many others have sold out prematurely, you can persist, even if you are amazed by the market's subsequent performance."

A good example of this phenomenon is the UK housing market. People have been calling the top of this market for several years, but prices have kept on rising since the mid-90s.

Or what about the Dow Jones? The US bellwether index had an almost uninterrupted run in the 90s as it rose from under 3000 to over 11,000 in 2000. Plenty of intelligent investors left the party way too early.

5. Know when to stay out of the market

Sometimes the best trade is not to trade at all. The fundamentals may be confusing and there is no clear trend in prices. In this situation, Farleigh reckons it's best to stay out.

*******

These aren't the only interesting axioms in the book. For example, Farleigh reckons that markets continue in their existing trend around 55% of the time, and reverse themselves in the remaining 45%.

He writes about all of this in an accessible style, so it should appeal to beginners as well as more experienced investors. I recommend it to all Fools.

You can buy Taming the Lion from the Fool bookshop.