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Markets' bargain bins have plenty to offer.

Byline: andrew farr

PEARLS of wisdom from the Sage of Omaha are thrown around like confetti, particularly in these days of the new austerity, so adding anotherWarren Buffettism in this column won't hurt: "Most people get interested in stocks when everyone else is. The time to get interested is when noone else is. You can't buy what is popular and do well."

At present, it seems to be the one Buffett quote that everybody has forgotten. Not that you can blame investors. You get burnt, you don't put your hand back on the grate.

Everything looks too much of a long shot, too exposed, too cheap - anything that gives would-be buyers the heebie jeebies. Right up to the point where the investment community's collective draw hit the deck when Berkshire Hathaway acquired railroad operator Burlington Northern Santa Fe.

But of course, not all investors do think this way. Even as the financial markets went to Hell in a handcart during the dark days of autumn last year, rarely any commentator remarked on the mini rallies seen at exchanges at the end of the day, as a sizeable bit of "nibbling" took place. And for anyone that will tell you that markets are efficient, investors rational and that there is a mathematically-definable trade-off between risk and return, there is a contrary piece of evidence that proves that rules are indeed for fools.

If markets work so well, why do we have bubbles? This is no modern phenomenon - there have been more than 30 of them - them being at least two standard deviations away from a trend in the past 85 years. We're still sucking up the pain from the bubble we had in our housing market, where previously experts had told us price rises could go on forever.

And if investors are rational, why are there rush buys and panic sells? How do they manage to make all the wrong decisions, along with thousands of others? The simple answer is that they herd, making decisions based on hearsay and sudden fluctuations, without asking what's going on behind it.

Similarly, we don't need to discuss risk and return, as that model is still burning. But this is often because of other theories that have found their way onto the funeral pyre: debt is good; acquisitions and mergers are better than organic growth; short beats long. In fact, the only one that hasn't bitten the dust is that the longer you leave your money in, the better it becomes. All you have to do is figure out when is best to remove it.

There is another saying, this time not from Buffett: "If it looks too good to be true, it usually is". Don't put too much stock in that word "usually", optimists. Instead, consider if something just looks good. The chances are that, at the moment, there might be quite a lot of them about.

This is where your skills as an investor come into play. Don't even consider this unless you've had some experience. You should know what criteria the asset must meet.

Rooting around in the markets' bargain bins does have proven benefits. Research carried out in Japan after its long period of recession and burst bubbles found that chasing a well-priced equity properly was returning around 3% a year, at a time when the markets those investors were operating in were performing at -4% annually. Even better, if you ignore so called "glamour buys" and go long, this strategy can ratchet those returns to around 12% a year.

Most investors reach a point where they finally see through the herding that affects fund managers and wonder if they can do better themselves. It is at that point that they might consider a second voice, in the shape of independent financial advice.

Andrew Farr is an Independent Financial Adviser with more than 20 years' experience working with high-net-worth clients managing their investment, pension and protection needs. He is the managing director of Cardiff-based Oakwood Financial Planning. The views expressed in this column are personal and do not constitute advice. Andrew can be contacted at andrew.farr@oakwoodfp., or by visiting


WORDS OF WISDOM: The Sage of Omaha Warren E. Buffett, chief executive officer of US-based Berkshire Hathaway Inc, owner of several major insurance companies
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:Dec 2, 2009
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