Investment: Selection vs timing: In his new column, the stocks guru looks at basic principles of share-buying

I DECIDED to write The Zulu Principle when my son became interested in investment as a career. He asked me to recommend some British books beyond the primer stage - like the 20 or so American books that he had already devoured. I searched my mind and then the bookshops only to find that there was an incredible gap to be filled.

In medicine, law and accountancy there are thousands of books covering every aspect of those subjects. I cannot understand why such an interesting subject as investment, so germane to everyone's financial health, has been so sadly neglected.

I have always been fascinated by reading about other financiers' (mostly American) approaches to and systems of investment. I am continually searching for further information on the detailed methods of successful money managers. I was therefore happily surprised at Christmas by one of my presents, The New Market Wizards by Jack Schwager.

He interviews over 20 of America's top traders in currencies, futures, commodities and stocks and then analyses their common characteristics, ending with a summary of 42 observations that he believes are the keys to their success.

Investing in shares is, of course, a longer-term proposition than speculating in financial futures and commodities, but many of the qualities needed for success are the same.

The main conclusion I reached from Schwager's summary was the absolute necessity of having a trading plan, a discipline, a method, a way of ensuring that you can develop an edge. A discipline to protect you from persuasive tips and a casual and sloppy approach. A method that you can temper, refine and improve by experience and constant practice. A narrow area of speciality in which you can become a relative expert.

You might decide to concentrate upon growth shares, high- yielding stocks, recovery stocks, asset situations, shells or new issues. Whichever you choose, during the coming months I hope to help you, as Magnus Magnusson might say, with your chosen specialised subject.

Growth shares are the best and longest-lasting prospect of future capital growth, so they will receive by far the most attention. Really good growth shares have the happy habit of continuing to compound your money year after year.

Let us look at a few familiar examples over the last 20 years (see table and graphic).

When Sainsbury became public in July 1973 there was nothing particularly clever in knowing that it was an exceptionally well-run company with a great future. If you had applied for shares and been given the standard minimum allotment of 100 shares costing pounds 145 that investment would now be worth over pounds 8,000.

It is interesting that even after this spectacular growth, nine brokers out of 20 in the January edition of the Estimate Directory rate Sainsbury as a buy and only three recommend selling. I am rubbing this in so that you will try to take more advantage of the next opportunity of a similar nature.

What about the market? Is it a good time to invest? The short answer is nobody knows. The optimistic signs are that worldwide interest rates are still falling, UK business appears to be picking up a little, the flow of money from savings deposits into unit trusts and the stock market should drive prices up further and the Coppock technical indicator (which has a very good track record) remains in positive territory. Also, the value offered by the stock market at this stage of the cycle seems reasonable provided the economy recovers with some vigour.

Against these arguments the recovery might falter, our public sector borrowing requirement seems insurmountable, and the American market appears to be relatively highly priced and could be vulnerable, especially if US interest rates are raised.

As you can see from the graphics, you should not be unduly concerned about the general level of the market provided you can find shares that are relatively very attractive and offer excellent long-term growth prospects.

Remember that since 1919 investment in the stock market has beaten deposits by 6 per cent per annum. As further supportive evidence, I have just read an interesting and recent study on market timing versus industry selection by the American firm CDA/Wiesenberger.

There are two gifted men - Mr A, who has the ability to time the market to a tee, and Mr B, who has always fully invested in the best sectors. Both investors began with dollars 1,000 on 31 March 1980 and by 30 September 1992 Mr A had been in and out of the market on nine occasions, timing each move to perfection. His dollars 1,000 had grown to dollars 14,650.

However, Mr B, who had always been fully invested in the best sector, turned his dollars 1,000 into dollars 62,640. During the same period, a dollars 1,000 investment in the S&P 500 would have grown to a mere dollars 6,030. The results achieved by Mr A and Mr B would have been hard to emulate, but they do show clearly that selection is far more important than timing.

The final illustration of this vital principle is the Coca-Cola story. The company was floated in 1919 at dollars 40 per share, but the price quickly slumped to dollars 20 because of wild gyrations in the sugar price. Since then there have been the financial crashes of 1929, 1974 and 1987, a few major wars and a depression or so. In spite of all these vicissitudes each dollars 40 share in Coca-Cola is now worth about dollars 1.8m.

Next week, I plan to give you details of my criteria for selecting great growth shares.

Mr Slater is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks of any mention in this column.

----------------------------------------------------------------- GROWTH OVER 20 YRS ----------------------------------------------------------------- 1973 1993 Original Current inv'mt (pounds) value (pounds) J Sainsbury . . . . . . . . . 10,000 568,627 Rentokil . . . . . . . . . . .10,000 464,876 Racal . . . . . . . . . . . .10,000 813,397 FTA All-Share Index . . . . . 69,830 10,000 -----------------------------------------------------------------

(Graphs omitted)