Mark Jeavons - The Equity Edge: A Complete Guide to Building Wealth Through the Stock Market

The Equity Edge

A complete guide to building wealth through the stock market

Mark Jeavons

Contents

About the Author

Mark Jeavons has successfully applied his quantitative skills and decades of investment experience to bottom-up analysis of stocks and shares using the system outlined in this new book, The Equity Edge . This has helped build a portfolio that provides significant income and growth and has helped him achieve financia l freedom.

As a professional investor, he has also helped to manage large family funds (as well as his own personal funds) across a broad range of assets, including equities. He holds masters degrees in economics and in statistics, and currently works for one of the largest asset managers in the world.

Acknowledgements

Emily this book is for you. Be happy and use the knowledge contained within to in vest well.

I cannot express enough thanks to my family and friends for their continued support and encouragement. This book would not have been possible wit hout them.

In particular, I would like to thank Professor Anneli Albi for her advice and encouragement throughout the journey of writing this book. Thanks also to David Jeavons, Steven Peake and Paul Cheng for reviewing the content and providing feedback. A special thanks to Ilona Szczepanczyk for all the creativity, inspiration and de sign work.

Chapter 1: The Equity Edge

Introduction Putting the odds in your favour

I f you want to grow your wealth over the long term, you need to invest. Common stocks shares in listed companies are one of the most effective ways to do so, boasting long-term performance that is hard to match. As a result, they play a core role in most investment p ortfolios.

But how do you go about investing in common stocks succ essfully?

What about beating the marke t average?

Can it be done reliably and safely , with your wealth protected from risk of substan tial loss?

I think it can. I have achieved returns of just over 15% a year; this is substantially better than the UK and world equity markets, which delivered returns of 5.2% and 6.9% per year respectively, over the same period. The superior returns were also achieved with lower risk of loss, with the largest drawdown on the portfolio being less than 12.5% compared with 47.7% and 52.8% drawdowns on UK and world equity markets, respectively. The approach I have used to do so is set out in this book so that anyone else can foll ow it too.

This is not the only way to make money from investing. But it is, in my view, a sensible, effective and enjoyable one based on some simple and logical principles, and some easy-to-follow methods.

The purpose of this book is to set out this system and its methods in a practical, no-nonsense guide, so that anyone who reads it will be able to successfully invest in company shares, with the aim of achieving superior returns compared to the market average all while protecting their wealth from the risk of substan tial loss.

It is written for individual investors and entrepreneurs interested in taking responsibility for their own investing and who value independent thinking and decisi on making.

I will explain how to implement my investment approach without the need for substantial professional help or years of specialised training. The system is designed to fundamentally improve the odds of growing your wealth by focusing on the key factors that ultimately deliver investment success, with good portfolio management to limit potential losses. This is achieved by taking an analytical approach that combines looking at company numbers and key qualitative aspects that are good indicators of the future performance of a given i nvestment.

Creating an equity edge

An equity edge is an investment strategy that allows a dynamic portfolio of shares to outperform the overall market over the long term. That is, there is an edge if the portfolio achieves higher returns than the market average with similar or less risk of loss.

The rate of return on your investments determines how quickly your wealth will grow. Achieving higher returns over the medium to long term means you grow your wealth more rapidly than the market attaining a higher absolute level of wealt h sooner.

The investment strategy described in this book creates an equity edge by using:

• focused business information analysis
• effective risk management
• market charting, which allows you to take advantage of underlying market pri ce cycles.

Analysing key information to assess the strengths and weaknesses of companies and their likely return potential over the medium to long term can provide an analytic edge. Analysis allows you to draw informed conclusions about companies and make better investment decisions. Selecting quality companies that can reliably grow earnings and create market value over long time horizons helps to provide consistent returns. More importantly, avoiding the poorest companies which are steadily destroying market value helps to avoid losses and achieve market outpe rformance.

While there are many smart professional investors who can analyse the same information and reach similar conclusions, skewed incentives and different investment time horizons mean that the analytical advantage is not fully competed away. Asset managers are generally evaluated and compensated on their performance over short periods of less than a year. This often means that even if a company is very cheap, if there is no obvious catalyst that will cause the share price to rise over the short term, they wont buy it. Its therefore a huge advantage to be able to invest in companies that are likely to have the best returns over a longer tim e horizon.

The adoption of effective risk management rules means the risk of loss from a single company or from a widespread drawdown is limited. This ensures that your wealth avoids permanent damage and that you can recover from losses relativel y quickly.

Drawdowns and volatility can harm long-term returns and cause investors to make mistakes due to behavioural biases. The rules are built into this books investment strategy to help limit behavioural mistakes through systematic ap plication.

If an investment continues to be loss making, the risk rules may eventually classify the investment as a mistake. Shares in the company will be promptly sold to cut losses, while money is reallocated to better performing companies. Conversely, when individual investments move into profit, some of these profits will be locked in, ensuring a gain can no longer become a loss. This allows portfolio profits to be run while losses ar e limited.

It is critical to manage overall risk to reduce time spent in drawdowns. Bear (or down) markets are a painful reality of the economic cycle and can devastate portfolio value if left unchecked. The risk rules naturally de-risk the portfolio in severe bear markets, such as the 2008 great financial crisis, by reducing equity allocations as the downtu rn begins.

By taking an agile approach, investors can enhance their compound and risk-adjusted returns over a complete market cycle using market charting . Market charting allows you to examine price movements to understand current price trends and where markets are in their respective pri ce cycles.

When a market is trending down, company share prices tend to fall as market sentiment remains bearish. During these periods, additional purchases of company shares are put on hold while some existing holdings, according to selling rules, may be sold (to limit losses or take profits) thus moving more of the portfolio into cash. This helps to limit short-term losses from a widespread market drawdown and ensures the portfolio is better positioned for a market recovery.