'Sell in May and go away' - at other times, pray

Anyone can keep up with the expert stock market soothsayers, says Magnus Grimond; A BEGINNER'S GUIDE TO; INVESTING IN SHARES

Stock market tyros will quickly discover that investing in shares owes as much to art as it does to science. More than ever, given the current uncertain state of the market, this means that the amateur has as good a chance of guessing which way prices will move as the professional, even with the most powerful technology at his fingertips. Frustrating though this may seem to the purists, it is very encouraging for the rest of us, helping as it does to tilt the playing field just a little away from the big City institutions and back towards the smaller investor.

Thus a few astute housewives who combined shopping with share-buying in J Sainsbury struck a vein of gold with their investments in the 1980s. And those who took a weekly stroll down the aisles and realised that the torch of the high-street revolution had been passed on to Tesco in the 1990s will have done even better. The reshaping of that company under former chairman Lord MacLaurin from a downmarket, "pile 'em high, sell 'em cheap" operation to the UK's leading supermarket group has seen the value of its shares rise more than two-and-a-half times over the last seven years.

The amateur investor will be heartened to know that this sort of homespun investment philosophy is much favoured by Warren Buffett, whose aphorisms have earned him the title of The Sage of Omaha. More to the point, by following his own advice he has amassed a fortune estimated at around $16bn, making him one of America's richest investors. His advice is simple: understand what you are investing in, buy it cheap and hold it for a very long time.

"Stocks are simple. All you do is buy shares in a great business, for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever."

That, of course, is easier said than done. Many successful investors will attest to the virtues of holding on to shares. But "letting profits run" is inevitably a riskier course than taking profits and "leaving something on the table for the next man". For example, shareholders who hung on to HSBC, owner of the Midland, First Direct, and Hongkong and Shanghai banks, would do well not to look over their shoulder. In the five years up to this August, the shares stormed up from around 350p to over pounds 23. But they were caught in the very eye of the Hong Kong market maelstrom of recent weeks and have slumped to little more than pounds 14, a fall of nearly 40 per cent in just over two months.

Selling can be a very difficult psychological decision to make, even if you know in your bones that a share price is over-exposed. One well- known stock market adage is to "sell in May and go away", although the less well-known end of that rhyme is "buy again on Leger day" (the first Saturday in September).

This may have had some relevance when the life of a gentleman stockbroker involved taking large chunks of the summer off for sporting events like Ascot, Henley and Wimbledon, depleting attendance and therefore the turnover of shares on the stock market. Sadly the stockmarket summer nowadays can be almost as busy as any other time of year, while history itself also tells against this old saw. Only in 1996 out of the last four years would the "sell in May" strategy have worked. David Schwartz, an independent analyst who has made a speciality of investigating past stock market patterns as far back as 1919, says the market actually rises in May and June around one year in two.

With recent events in mind, it is interesting to note that October has proved to be a particularly bad month for major market crashes. Both the 1929 and 1987 slumps occurred in this month, as of course did the latest mini-crash, although Mr Schwartz says prices actually rise in October in six out of every 10 years.

A much more predictable annual event is the Christmas rally. The stock market has put on a last minute spurt from around the middle of December to the end of the month in each of the last three years. Indeed, according to Mr Schwartz, this happens more than 80 per cent of the time. Such strength is probably not just an excess of festive anticipation, but is more likely fund managers' attempts to "window dress" their portfolios. By temporarily pushing up share prices at the end of the year, when the performance measurement statistics are compiled, the state of the investments they manage can be made to look much better.

The advice to "buy on the rumour, sell on the news" also tends to be a reliable predictor of share price direction. Perhaps the most striking example of this is when a share price falls despite the announcement by a company of bumper profits. Often this is because analysts, the forecasters employed by stockbrokers who have a major influence on share prices, had been forecasting even higher profits.

But most small investors do not have the time, inclination or access to the necessary information to play the market so minutely. Next week we will look at some of the techniques used to tap into the long term benefits of investing in shares which entail less involvement on the part of the shareholder.