Most financial advisors will tell you that a balanced portfolio should be split between stocks and bonds. Stocks, they will say, are ‘high risk’, whereas bonds are ‘low risk’. They will advise that when you are young you can afford more risk than when you are old, so a high proportion of stocks is acceptable. But as you get older the proportion that you invest in bonds should increase to protect your capital. A common rule of thumb is to use your age as a percentage for bonds. So a 20 year old should invest 20% in bonds, and a 50 year old should invest 50% in bonds.

Many financial advisors will tell you that investing in individual stocks is unwise. Because the market is efficient, any new piece of information that becomes available about a company will instantly be reflected in the stock price. Because of this, it is impossible for an individual investor to gain an advantage over the market through stock selection, and it is safer to invest in index funds or well managed mutual funds.

You will be advised to diversify your investments and periodically – typically every 6 months – ‘rebalance’ your portfolio. So that if the percentage of your funds in stocks outpace your bond funds then you should sell some stock funds and buy bond funds. This will keep your portfolio in the correct balance for your current age.

All of this advice seems very sensible. No advisor is ever going to run into trouble by advising you to invest in this way. And if the height of your ambition is to just beat inflation and return a little below the market average – along the lines of 8% p.a. – then if you follow this advice you will do just fine.

But if you want to join the millionaire club – that small handful of investors that have accumulated millions from modest stakes (often invested in tax-free shelters) – then you will need to think again.

The way that successful investors manage their money is completely different.

In Guy Thomas’s book ‘Free Capital’, Thomas interviews a dozen highly successful UK investors, half of whom have accumulated over £1million tax free in ISA accounts. Investor ‘Vernon’, started investing in 1998 and became an ISA millionaire by 2005. An incredibly, impressive performance when you consider that over this period the maximum annual limit for investing in an ISA was just £7,000 per annum.

Vernon summed up his attitude to convention neatly, ‘Learning modern portfolio theory to pick investments is like learning physics to play snooker’.

I have surveyed the methods of a wide range of investors, including Shelby Davis, Peter Lynch, Warren Buffett, Philip Fisher, Victor Niederhoffer, George Soros, David and Tom Gardner, Tom Gayner, Benjamin Graham, and many others with no public profile. None of these, or any of the twelve investors in Thomas’ book use an approach anywhere near the conventional approach.

Just as snooker players ignore physics and concentrate on making the shot in front of them, successful investors focus on businesses. To become a top level snooker player, having an aptitude for the game takes second place to being able to remain cool under pressure. And for investors, a cool temperament is far more important than a facility in selecting securities.

Some of the investors I have studied have an approach that would be impossible to replicate for the individual investor. George Soros and his friend Victor Niederhoffer fall into this category. In truth, it would be more accurate to categorize these as speculators rather than investors. And for that reason I have excluded them from the set of investors that I have used to determine the core values that underpin successful investing.

But the great investors, Buffett, Lynch, and Davis – and the vast majority of the others that I have studied – have an approach that can be adapted by anyone with patience and a little application.

Not only that, but the common themes that run through their methods make it possible to distil a ‘best of the best’ approach to successful investing.

Next Topic: The Bond Fallacy