First, you need to understand the competition. What are the professionals' strengths and weaknesses? Most fund managers are intelligent enough, but their performance is impeded because they cover mostly large-cap stocks, tend to be restricted in what they can buy and most importantly avoid taking contrarian views. Too often they pour cash into equity bubbles only to be hurt when the bubble bursts.

Second, you need to select your battle grounds carefully. I don't try to be an expert on everything, but instead seek out under-researched sectors, where there is a lack of analyst coverage. This exercise requires patience (for every 100 opportunities investigated, less than 5 are worth buying) and hard work. It's not just about balance sheets, you need to speak to the management, read the trade press and even attend industry conferences, if you really wish to understand the business.

Finally, before buying a company's shares, you need to work out their underlying value. I only buy if I believe that:
· the share price is less than 30% of its fair value, which builds in a healthy margin of safety.
· with a 80% certainty, the share price will appreciate

So when is the best time to sell?

Picking an undervalued share is obviously the critical part of successful investing. But equally important is knowing when to sell. Many investors get this wrong, or try and ride things too far.

I sell when my rationale is wrong, when I find a much better investment, or when a stock looks over-valued and hence vulnerable. Many times I hear that the "trend is your friend" and you should "run your winners". But this seems pretty dubious to me. If there is a buying frenzy and a share price rockets, then holding on in the hope that it will go higher is purely gambling. Eventually common sense prevails, and gains are wiped out. It's purely a matter of when, not if, the correction occurs.

Although this disciplined approach misses the top of investment bubbles, it also avoids the subsequent sharper crashes. Neither trends nor share prices can defy gravity forever.

Here's a diagram which illustrates the depth of my research into potential new investments.

The Three-Stage Approach

What to expect when you invest in under-valued companies

As with all our recommendations, we don’t aim to make a fast buck. If this does happen then great, but our strategy is to select out-of-favour companies on attractive valuations that offer compelling value for shareholders. On some occasions (and I know this from experience) these stocks can stay in the doldrums for a long period of time before the true value starts to shine through. Successful investing is not only about selecting the right companies, it also requires patience and steely nerves. And this is particularly true when a share price continues to fall, even though it appears to be substantially under-valued.

Furthermore we try to steer well clear of "momentum plays" or "hot stocks", where business fundamentals do not support rocketing share prices. Our approach is to look purely at the underlying value of the company, irrespective of market sentiment about it. Of course it's immensely gratifying (and profitable!) when the market finally cottons on to an undervalued company, and the share price rises. But there can be long periods of time when absolutely nothing happens. That's the price that has to be paid.

Capital preservation is crucial

Finally capital preservation is something we value very, very highly. We aim to both deliver steady long-term capital appreciation and outperform the major benchmark indices - by using sound economics and detailed research, rather than rely on technical analysis (or charting).