Boost financial success by using your business brain

16th May 2012

As Tadas Viskanta, founder and Editor of Abnormal Returns, author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, and a private investor with over 20 years of experience in the financial markets, says on his blog: "That business has a certain amount of overhead that has to be covered before investing begins to pay off in any meaningful way. For many investors those costs, especially once you take into account opportunity costs, never get covered."

He adds that a post by David Henderson at EconLog passes along some hard earned knowledge from an experienced tax accountant – advice that is both relevant for business owners and investors.

So what are the tips to bear in mind?

Don't have a large overhead.

This means consider the charges before you begin – as otherwise they could eat into your profit.

From June, investment trusts will no longer publish a total expense ratio (TER) in the literature they provide to investors, says the Financial Times (paywall), making it particularly important to consider what the charges involved might be.

Any return or loss, whether on investment or unit trusts, depends on charges. Quite simply charges can mean you spend £10,000 on an investment but only get £9,500 worth of it. However well or badly your investment performs, this means you're taking a hit which you need to be aware of.

However, there are ways around this – For example, by heading straight for a special ‘discount broker'. These are specialist ‘execution only' firms that sell you whatever fund you request – like IFAs, they receive commission from the fund managers but as they simply execute the transaction and don't give advice, their costs are much lower.

Be "footloose."

That is, be able to adjust quickly when things go bad. That doesn't mean jumping ship out of panic or not opting for a long-term investment – but to consider your position and be prepared to make rapid changes for investment success. So if you see an opportunity – grab it – just as if, given all things considered in a rational manner, it looks like your investment will only go to pot you may be wise to swallow your losses and look elsewhere.

Take advantage of-and maximize if at all possible-all of the tax-advantaged ways of saving that you have access to.

ISAs and pensions will usually form the core of any investment portfolio. ISAs offer huge investment flexibility, and all income and capital gains are free from further tax, although the 10% tax at source on share dividends paid within ISA funds cannot be reclaimed.

For higher-rate taxpayers, income tax rates are more than double those for capital gains tax (CGT), so it can make more sense for them to put income-generating investments such as equity income funds or corporate bonds into their ISA. In this way, they can generate a long-term, tax-free income stream. For those willing to take risk in pursuit of high rewards Venture Capital Trusts (VCTs) are another tax-efficient investment.

Finally, a recipe for business and stock market success – be different…

John Kingham, author of blog UK Value Investor, refers in a Mindful Money blog post to the book Repeatability, by Chris Zook and James Allen of Bain & Company.  "Although the book is about building enduring businesses that can cope with constant change, what struck me was how applicable some of the ideas on building a great business were to investing."

He says: "It's important for a business to differentiate itself from the competition, but this idea also applies to many of the most successful investors. It's hard to beat the market if you're doing exactly the same as everyone else.

"With value investing, being different is a core part of the philosophy. Simply by buying those stocks that are relatively cheap, you are almost guaranteeing that what you're doing is different from everybody else. Of course there are lots of value investors out there, but compared to the total population of investors, we're a tiny minority."


More on Mindful Money:

Can risk be managed?

Would a dose of optimism help Greece?

How to be a mindful investor

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