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Boost Your Returns The Grand Masters’ Way

As a chess player, I burned out years ago. Obsessive in my teens and at university, I didn’t touch a chessboard again for over 25 years, when I taught my son how to play.
 
Which I mention because a piece of my favourite chess lore is also a sage piece of advice when it comes to investing.
 
Namely, this: when you spot a good move, sit on your hands — until you either see why it isn’t such a good move, or you spot a better one, instead.
 
And as advice goes, it’s done me proud over the years.

Chinese takeaway

Spend any time on internet investing forums — certainly at the more rabid end of the scale — and it’s not too difficult to come across people who would have benefited from following this strategy.

And right now, it’s likely that shareholders in several high-profile ‘get-rich-quick’ stocks are probably wishing that they, too, had sat on their hands.
 
In the case of Chinese sportswear company Naibu, for instance, the company’s London-based non-executive directors were forced to confess last week that they have been unable to make contact with the company’s most senior directors, and so are no wiser as to the state of the company’s finances — or, indeed, investors’ funds.
 
Hitting 140 pence shortly after floating in early 2012, the shares drifted downwards as bad news followed bad news, and were eventually suspended earlier this year at 11.5 pence.
 
Will investors see anything of their money again? It’s all rather unclear, frankly.

Act in haste, repent at leisure

As I’ve said here before, major macro events — such as a dramatic collapse in the price of oil or other commodities — can throw up interesting opportunities.
 
Recently, for instance, I bought into industrial engineering business Fenner, which serves both the mining and oil industries. Predictably, its shares have more than halved over the past year.
 
British Gas owner Centrica is another hard-hit business, suffering from falling oil prices, reduced consumer demand due to warmer weather, and Labour Party leader Ed Miliband’s high-profile promise to cap energy bills.
 
But for me at least, the trick with the opportunities is not to be too hasty — in other words, to sit on my hands. Why? Because a share that seems cheap can always get cheaper still.

Decent business, bargain price

I see from my records, for instance, that Fenner appeared on my watch list late last spring, on 27 May 2014. When I bought the shares back in early January, they had fallen some 40% from the level at which my antennae first twitched.
 
Had I moved precipitously, I’d now be sitting on a hefty loss — at least on paper. As it is, I reckon that I’ve bought into a solid business at a bargain price. And I’m banking a decent yield, to boot.
 
With Centrica, the company has been on my watch list even longer — since 11 February 2014. And I’ve yet to push the ‘buy’ button. But with the price down a further 8% on Thursday’s full-year results, I suspect that day is getting closer.

And the same moral will doubtless apply: by sitting on my hands, I’ll secure a stake in a decent business, and one that — even after Thursday’s dividend cut — still offers a very decent yield.

Margin of safety

So is there a downside to my strategy of sitting on my hands? Yes, very much so. Because some bargains are transitory, and if you mull them too long, they vanish.
 
It’s worth pointing out, for instance, that the vast majority of the shares on the two watch lists that I maintain are posting hefty gains. So did I miss the boat by waiting, and not buying? Perhaps. But equally, perhaps they’ll once again slip back.
 
Put another way, for an investor with a finite amount of capital to invest — namely, me — a strategy that results in maybe one share purchase for every ten shares that are placed on a watch list doesn’t seem too far out of kilter.
 
In short, I’d sooner bag one very decent bargain on a decent margin of safety, than plump for a handful of not such good bargains, on not such a good margin of safety.
 
How about you?

We focus on investing in great businesses for years rather than good businesses for months. It's over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.

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Malcolm owns shares in Fenner. The Motley Fool has recommended shares in Centrica