When to enter and exit investment markets

What Mr. Shipman has to say is not necessarily original; indeed much of it is blindingly simple. But you could say the same about Warren Buffett. It is the way he combines various commonsense options that is so clever, and this is not rocket science, anybody with a reasonable education can follow his advice.

Mr. Shipman is a highly successful investor himself and has invested in many different asset classes over the past 20 years. His trick is to spot an undervalued asset class, buy into it and stay with it as a 'momentum investor' until prices first show sign of significant weakness and then sell out.

He explains how to spot an undervalued asset class in some detail. But in a nutshell it is a question of noting an asset class that offers good returns but is being shunned by most investors for no obvious reason except past negative performance.

For example, Mr. Shipman invested into UK property in 1994 after the worst post-war recession of the early 1990s when the rental yield was strong and prices on the floor; and he did so with a 70:30 debt-to-equity ratio. When he sold out in 2002 prices had more than doubled and rentals had more than paid borrowing and management costs; and the leveraging amplified the return to more than five-fold on the equity employed.


He notes, as many commentators do, that investment cycles are remarkably similar for all asset classes, and move in three phases: disbelief, conversion and euphoria. Interestingly he remarks upon one characteristic of phase two as being reluctance on the part of some investors to buy an asset that has already gone up in value.

His views on phase three are also novel. Instead of selling up the moment euphoria appears - with everyone piling into an asset class like UK housing in the early 2000s - he counsels patience. His experience is that phase three can last for sometime and that getting out too early is a mistake.

So he suggests staying in until the first price correction is observed and then selling out immediately. For after any sell-off in a euphoric market there are always a few late buyers who will snap up slightly cheaper assets, and then take the full hit of the real downturn later.

This model served Mr. Shipman equally well in buying the S&P 500 Index in the US stock market in the 1990s, and he got out a little early in 1999 having pocketed a good profit. No doubt his formula would have worked equally well in the Arabian stock market boom of the 2000s, but this does require a certain discipline and patience to pull off successfully.