ABOUT THE AUTHOR ‘This is one of those great big books to buy and then tuck away for constant reference. FT It’s a tour through everything from managing a portfolio to establishing a fair intrinsic FT Guides value for a share. If it moves in the world of investing, its probably here.’ Guides Glen Arnold is a businessman, investor and David Stevenson, ‘Adventurous Investor’ in the Financial Times a professor of fi nance at Salford University. FINANCIAL TIMES Guides INVESTING He is the author of numerous fi nance and ‘The most damaging half truth for savers is “performance matters more than expenses”. investing books including Corporate Financial Read this book carefully and the fi nancial services industry will have one fewer easy Management, The Handbook of Corporate victim, but you will have a sound base for a lifetime of successful investment.’ The Financial Times Guide to Investing shows Finance and The Financial Times Guide to Martin White, Chair of UK Shareholders’ Association how investing can be both profi table and fun. It Value Investing, all published by Financial explains the essentials of investing as well as INVESTING Times Prentice Hall. ‘Informative and easy to read, Glen Arnold has produced arguably the most describing how the fi nancial markets really work. comprehensive book there is today on stock market investing and one that unquestionably will give an edge to any retail investor. This is a must read for THE DEFINITIVE COMPANION TO This book explodes the myth that only the wealthy can afford to buy and sell shares and anyone serious about investing.’ INVESTMENT AND THE FINANCIAL shows you why you can be just as successful Simon Thompson, Companies Editor, Investors Chronicle trading on your own as you would be employing MARKETS a fund manager. It will help you build a profi table SECOND EDITION personal fi nancial portfolio. • What is investment? The Financial Times Guide to Investing is the defi nitive introduction to the art of successful stock market investing. Beginning with the very basics of why companies GLEN ARNOLD • The rewards of investment need investors and explaining what investors do, Glen Arnold takes you through the • Understanding stock markets practicalities of buying and selling shares. He describes different types of investment • Using the fi nancial media vehicles and advises on how you can be successful at picking companies, understanding • Buying and selling shares their accounts, managing a sophisticated portfolio, measuring performance and risk • Pooled investments and setting up an investment club. • Investing in bonds The second edition of this bestselling introduction to investing explains how the • Futures and options fi nancial markets operate, shows you what you need to know to be successful and • Financial spreadbetting encourages you to follow and act on your own judgements. Thoroughly updated to • Analysing companies and industries help you invest with skill and confi dence, new sections include: SECOND • Mastering company reports and accounts • Online investing, website information and tools including screenshots and virtual EDITION • Key investment ratios and measures portfolios as well as computerised counterparty trading • Tricks of the accounting trade • Detailed updating of tax rates and legislation, increases in ISA allowances and • Managing your portfolio revisions to capital gains tax • Mergers and takeovers • A jargon-busting glossary to help you understand words, phrases and investing concepts • Taxation and investors • Recent Financial Times articles and tables which illustrate and expand on case • Measuring performance studies and examples • Investor protection • Up-to-date statistics on the returns you can expect on shares and bonds • Investment clubs INVESTING Visit our website at www.pearson-books.com Visit our website at Front cover image www.pearson-books.com © Getty Images CVR_ARNO3745_02_SE_CVR.indd 1 16/10/09 15:53:59 ARNOLD INVESTING The Financial Times Guide to Investing A01_ARNO3745_02_SE_FM.indd 1 20/10/09 08:07:13 In an increasingly competitive world, we believe it’s quality of thinking that will give you the edge – an idea that opens new doors, a technique that solves a problem, or an insight that simply makes sense of it all. The more you know, the smarter and faster you can go. That’s why we work with the best minds in business and finance to bring cutting-edge thinking and best learning practice to a global market. Under a range of leading imprints, including Financial Times Prentice Hall, we create world-class print publications and electronic products bringing our readers knowledge, skills and understanding, which can be applied whether studying or at work. To find out more about Pearson Education publications, or tell us about the books you’d like to find, you can visit us at www.pearsoned.co.uk A01_ARNO3745_02_SE_FM.indd 2 20/10/09 08:07:13 The Financial Times Guide to Investing The definitive companion to investment and the financial markets Second edition Glen Arnold A01_ARNO3745_02_SE_FM.indd 3 20/10/09 08:07:14 PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE Tel: 144 (0)1279 623623 Fax: 144 (0)1279 431059 Website: www.pearsoned.co.uk First published in Great Britain in 2004 Second edition published 2010 © Pearson Education Limited 2004, 2010 The right of Glen Arnold to be identifed as Author of this Work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1998. ISBN: 978-0-273-72374-5 British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library Library of Congress Cataloging-in-Publication Data A CIP catalog record for this book can be obtained from the Library of Congress All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. 10 9 8 7 6 5 4 3 2 1 13 12 11 10 09 Typeset by 3 Printed and bound in the UK by Ashford Colour Press Ltd, Gosport, Hants. The publishers’ policy is to use paper manufactured from sustainable forests. A01_ARNO3745_02_SE_FM.indd 4 20/10/09 08:07:14 To two inspiring teachers of what is really valuable, Chris and Brenda Arnold, my parents A01_ARNO3745_02_SE_FM.indd 5 20/10/09 08:07:14 About the author Glen Arnold is an investor, businessman, author of many investment and corporate fnance publications and professor of fnance (part-time) at the University of Salford. He heads a research team focused on stock market mispricing. A01_ARNO3745_02_SE_FM.indd 6 20/10/09 08:07:14 Acknowledgements This book draws on the talents, knowledge and contributions of a great many people. I would especially like to thank the following. Warren Buffett who kindly assisted the illustration of key points by allowing the use of his elegant, insightful and witty prose. My personal assistants, Susan Henton and Rebecca Devlin, for their hard work, professionalism and enthusiastic support. Riccardo Landucci of stockbrokers Charles Stanley who took time to read Chapter 4 and made valuable suggestions for improvement. Gill Hart at the Financial Times for her energetic support for the project. The team at Pearson Education (FT Prentice Hall) who, at various stages, contributed to the production of the book: Chris Cudmore, Martina O’Sullivan, Anna Campling, Laura Blake, Rose James, and Kay Holman. Sarah Mitchell, Liz Royle and my wife Lesley, who bravely faced my handwriting to type much of the manuscript. Huw Morgan and Alison Kennedy of the University of Salford who devoted time to reading Chapters 11, 12 and 13, and suggested valuable improvements. The publishers are grateful to the following for permission to reproduce copyright material: Figures Figures 2.2, 2.3 from Equity Gilt Study 2009 (Barclays Capital), Barclays Bank PLC is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange. Barclays Capital is the investment banking division of Barclays Bank PLC and undertakes US securities business in the name of its wholly owned subsidiary Barclays Capital Inc., a FINRA and SIPC member. Neither Barclays Bank PLC nor any affliate nor any offcer or director of any of them accepts any liability or loss arising from any use of this publication or its content. This publication is for discussion purposes only and shall not constitute any offer to sell or any solicitation to buy any A01_ARNO3745_02_SE_FM.indd 7 20/10/09 08:07:14 viii The Financial Times Guide to Investing security nor is it intended to give rise to any legal relationship between Barclays Bank PLC or any of its affliates and you or any other person, nor is it recommended to buy any securities or enter into any transaction. Figure 3.1 from World Federation of Exchanges (www.world-exchanges.org), 2009 (Figures are for 2007); Figures 3.3, 4.12, 4.14 from London Stock Exchange; Figures 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10 from www. advfn.com; Figure 4.11 from www.moneyam.com; Figure 14.1 reprinted with the permission of The Free Press, a Division of Simon & Schuster, Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved; Figures 8.7, 9.2 from www.nyx.com/nyseliffe Tables Tables 2.1 and 2.4 from Credit Suisse Global Investment Returns Yearbook 2009, Credit Suisse Research Institute (Dimson, E., Marsh, P., and Staunton, M. 2009). Copyright © 2009 Elroy Dimson, Paul Marsh and Mike Staunton. Elroy Dimson, Paul Marsh, Mike Staunton are authors of Triumph of the Optimists: 101 Years of Global Investment Returns, Princeton University Press, 2002. Tables 2.2, 2.3, 2.5 from Equity Gilt Study 2009 (Barclays Capital), Barclays Bank PLC is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange. Barclays Capital is the investment banking division of Barclays Bank PLC and undertakes US securities business in the name of its wholly owned subsidiary Barclays Capital Inc., a FINRA and SIPC member. Neither Barclays Bank PLC nor any affliate nor any offcer or director of any of them accepts any liability or loss arising from any use of this publication or its content. This publication is for discussion purposes only and shall not constitute any offer to sell or any solicitation to buy any security nor is it intended to give rise to any legal relationship between Barclays Bank PLC or any of its affliates and you or any other person, nor is it recommended to buy any securities or enter into any transaction. Table 3.1 from London Stock Exchange; Table 3.2 from Share Ownership 2006, www.statistics.gov.uk, Offce for National Statistics, Crown Copyright material is reproduced with permission under the terms of the Click-Use License. Text Box 5.16 from Warren Buffet Chairman’s Letter to Shareholders accompa- nying the 2005 Annual Report of Berkshire Hathaway Inc., reproduced with kind permission of the author. Copyright remains with Warren Buffett. Extract on page 435 from Warren Buffett Chairman’s Letter to Shareholders A01_ARNO3745_02_SE_FM.indd 8 20/10/09 08:07:14 Acknowledgements ix accompanying the 1994 Annual Report of Berkshire Hathaway Inc., reprinted with kind permission of Warren Buffett. © Warren Buffett. Extract on page 436 from Warren Buffett Chairman’s Letter to Shareholders accompanying the 1981 Annual Report of Berkshire Hathaway Inc., reprinted with kind permission of Warren Buffett. © Warren Buffett. The Financial Times Box 3.1 adapted from Globaltrans set for LSE listing, Financial Times, 5 April 2008, p. 42 (Wright, R.); Box 3.2 adapted from Disclosure rules test the judgment of businesses, Financial Times, 5 January 2009, p. 43 (Peel, M. and Murphy, M.); Box 3.3 adapted from Tighter rules forcing nomads to run from smaller companies, Financial Times, 18 June 2008, p. 21 (Masters, B.); Box 3.4 adapted from Audience hushed as Secora moves to another stage, Financial Times, 26 September 2008, p. 27 (Blackwell, D.); Box 4.1 adapted from This week: decisions to be regretted, Financial Times, 29/30 June 2002 (Berwick, I.); Box 4.2 adapted from Deal of the Week Nominee Shareholder Rights, Financial Times, 10 January 2009, p. 4 (Lodge, S.); Box 5.1 from Managed funds service Schroders, Financial Times, 3 April 2009, p. 29; Box 5.2 adapted from Call the tune if you are paying the piper, Financial Times, 2 February 2009, p. 6 (Thomas, D.); Figure in Box 5.2 from Call the tune if you are paying the piper, Financial Times, 2 February 2009, p. 6 (Thomas, D.), Source: Lipper; Box 5.3 adapted from Vanguard’s UK foray to spark price war, Financial Times, 7/8 February 2009, p. 8 (Kelleher, E.); Box 5.4 from Fund managers do a lot of window dressing, Financial Times, 2/3 August 2003 (Jolliffe, A.); Box 5.5 adapted from Financial Times, 26 March 2009, p. 32; Box 5.6 from Financial Times, 7 April 2009; Box 5.7 adapted from Try putting your trust in infra- structure, Financial Times, 14 June 2008, p. 4 (Somerset Webb, M.); Box 5.8 adapted from Cash reserves can still pay dividends, Financial Times, 7 February 2009, p. 8 (Ross, Alice); Box 5.9 adapted from Insurer lowers bonuses, Financial Times, 10 January 2009, p. 1 (Moore, E.); Box 5.10 adapted from Putting the pig in a more transparent poke – The FSA and with-profts, Financial Times, 29 May 2002 (Dickson, M.); Box 5.11 adapted from Time to withdraw from with-profts, Financial Times, 25 October 2008, p. 7 FT Money (Cumbo, Josephine); Box 5.11 from Sell or surrender, Financial Times, 25 October 2008, p. 7 of FT Money (Cumbo, J.); Box 5.12 adapted from Cash beats with-profts, Financial Times, 1 November 2008, p. 1 FT Money section (Vincent, M.); Box 5.13 adapted from If this industry can rip off consumers, it will, Financial Times, 6/7 July 2002 (Jolliffe, A.); Box 5.14 adapted from Commission bias raises suspicions on bonds, Financial Times, 31 January 2009, p. 9 (Ross, A.); A01_ARNO3745_02_SE_FM.indd 9 20/10/09 08:07:14