Income investing makes some people yawn. The press use the term to describe buying an investment mainly for the sake of the dividends or the interest cheques, rather than for the capital gains that you make if you've bought and sold your shares wisely. Most cash investments, such as bank or building society deposits, are income products. But the same can apply to any kind of share that happens to pay high dividends to its shareholders. Or, of course, to the tax-free National Savings investments (bonds, equity funds and cash accounts) that brighten so many retired people's lives.

In Chapter 5 I talk about the sort of people who favour income investments. They tend to be long-term investors who don't like surprises and who try to avoid risks whenever possible. Often their tax situation means that they're better off with income than with capital gains. Thus, for example, a person setting up a trust to save for a child's school and university fees probably opts for income investments: partly because they can effectively use up her income tax allowances, and partly because their low level of risk makes them attractive.

A third type of people go looking for income, and they're the people who use tax-effective instruments such as Individual Savings Accounts (ISAs) or self-invested pension policies (SIPPs) to 'roll up' surprisingly large sums of money over several decades.

The growth rate's even faster if the dividend payments are half the size but come in twice a year instead of just once. Impressed? Aye, perhaps those old pipe-smoking bores are wiser than they look.

The issue, of course, is that you do have to be really very sure that your income investments really are as reliable as they seem. In Chapters 2 and 3 I show you a few supposedly safe and predictable bets that turned out to be anything but. So take care, and don't get misled by mere numbers.

Figure 4.1. Returns from 4 per cent per annum on a £10,000 investment.

Figure 4.2. Returns from 5 per cent per annum on a £10,000 investment.

You also need to spend a little time deciding whether an Individual Savings Account (ISA) or some other form of investment may give you the best protection from HM Revenue and Customs. At one time an ISA was the ideal way to get your dividends tax free; but now that the special dividend tax breaks through ISAs have more or less vanished, a self-invested pension policy (SIPP) or even a trust of some sort may be a more tax-effective way of going about the task. But that's getting outside the scope of this book, which is about the financial pages. For more details on these thorny issues, read the excellent guides to Investing for Dummies and Investing in Shares for Dummies.

Long-term buy-and-hold (LTBH) strategies are still the most popular techniques among investors. Basically, you buy a share that you think's going to be a good 'un for the long term, and you don't worry too much about whether it happens to be up or down by 5 per cent or so on this particular week because you've got your eye fixed firmly on the far horizon.

An averagely active investor probably spends a lot of her time worrying about nothing. If the price of Acme Screws goes down 5p when the market opens in the morning, she's going to watch the price all day to see whether or not some bad news is unloaded on the market, or if Washington is about to launch an embargo on European screw imports, or whatever. And nine times out of ten, she hasn't done anything about it by the time the market closes at the end of the day. No buying, no selling, just watching. Active investors spend a lot of time watching. And drinking coffee, and chewing their fingernails.

In contrast, LTBH investors spend a lot of time sitting in their armchairs, or getting on with their work, or playing with their families and thinking about what they're going to have for supper. LTBH investors have more fun!

They also have the pretty considerable advantage of being able to sleep much better at night, because they don't clog up their brains with stressful stuff. Staying fixed on the long-term horizon is an excellent way to stay sane.

Back in the good old days before the Big Bang revolutionised the London market in 1986 (see Chapter 3), LTBH was the only kind of investing that really made sense for an ordinary citizen. High broking commissions and heavy taxes meant that making a share purchase cost you around £30 in mid-1980s money – probably closer to £70 in today's money. So you weren't exactly going to be nipping in and out of the market every few days in search of a hairline profit. Instead, you relied on your financial adviser (usually your broker) to set you up with a portfolio that didn't need too much trimming and adjusting. You probably feel the same way about your pension plans right now: you just want to set something up and let it run for years on end with very little attention from you.

That said, of course, you do have a choice. The Web is full of cheap broking deals that let you trade as often as you like, and at the instantaneous push of a button, for as little as £6 per trade. And since you only pay stamp duty on purchases, not on sales, you may find just going ahead and trading very tempting.

Value investing is for people who are in a hurry to get places and don't intend to wait around. If you hold that the market is inefficient and prices are often 'wrong' in relation to the underlying value of the companies involved, all you really have to do is buy the shares while they're cheap and sit tight until their real value's revealed. And then you cash in. Dividend yields mean next to nothing, except that they can be a useful flag to show that something's out of kilter in the share valuation; and, according to some value investors, even debts don't count for much – you're after capital growth, and a share price ignores both of those things when things are going well.

But you can't be a value investor without taking bigger than average risks, and you have to be a bit of a whiz with the calculator (not to say an expert in company accounts) to work out which shares the market's outrageously ignoring and which ones are just putting on a brave face to disguise the fact that they're genuinely rotten to the core. If the idea of taking on this task doesn't frighten you, then you may qualify to join the gallant band of value investors.

Where value investors really differ from most people is that they don't mind digging around among the fallen ruins of once-mighty companies for their trophies. And nor are they afraid to tread in those two warrens of booby-traps that pass by the innocent names of the Alternative Investment Market (AIM) and the over-the-counter (OTC) market.

AIM shares are more lightly regulated than normal listed shares, meaning first that the financial reporting requirements are relaxed for these companies, and secondly that most of the normal protective restrictions on how much of a company one person can own go right out of the window, so you can sometimes find yourself well and truly snookered by a management that plays fast and loose with its own power. Buyer beware, unless you have deep pockets and an unerring instinct for a bargain.

A value investor's response is normally to say: 'Yes, AIM companies are also ineligible to go into a tax-efficient ISA or a PEP, a fact that may be of some concern to you if you consider that probably half of all AIM-listed companies go bust. And rather more in the case of OTC shares.

I understand all that. Now please stand aside and let me invest my money. I'll buy 20 companies, and if 10 of them go completely under at a 100 per cent loss I'll still have made a good profit because the other 10 will have cleaned up.'

The remarkable thing is that they're generally right in the long term. Over the two and a half decades since the first lightly regulated companies were allowed into their own corner of the stock market, AIM-type investments have soundly beaten the overall long-term stock market averages.

Overall. Long-term. Note those words carefully. One of the biggest problems that value investors have to face is that value opportunities tend to come and go in cycles. During some periods, maybe years on end, AIM companies absolutely bomb – mostly when interest rates are high (because troubled companies tend to be in a lot of debt), or because the market is just wobbly and all the mainstream investors have pulled back their money into lower-risk investments.

Where do you look for enlightenment if value investing's your chosen path? To the company accounts, of course, and also to Internet-based forums like ADVFN (www.advfn.com) and the Motley Fool (www.fool.co.uk). You spend a lot of time scouring blogs for clues, but you're suitably careful because an awful lot of rampers exist. (Rampers are people who buy cheap but rotten shares, then tell everybody how good they are and sell as soon as the price goes up, leaving their victims to choke in the dust.)

Back in the mid-1990s, when the Internet was just starting to make home share trading seem like a viable option for the average punter, day trading briefly became the dinner party subject. I must have met dozens of clever young people with big black circles under their eyes who told me they were making fortunes by buying and selling shares at the push of a button, maybe a dozen times a day, in the comfort of their own home. The trick, they said, was to find a share that you thought was looking a little bit peaky on a particular day, and then buy it in the hope of offloading it later the same day at a modest profit. If you did this often enough, they said, all you had to do was make enough to pay your rock-bottom dealing costs (£6–10 per trade, typically) and you'd be laughing. Every night you 'closed down all your positions' (that is, sold all your holdings) and went to bed on your profits or your losses. Keeping your positions open for two days or more was strictly for wimps.

Ten years on, I doubt whether many of these people are still using the comfort of their own homes in the same way. Their partners have left them, their children hardly recognise the square-eyed creatures they've become, and in some cases their homes are no longer their own. You struggle very hard to find anybody who's making money in any consistent way through day trading.

And yet the lure of the quick day-trading buck endures. Intelligent people are still gambling with both their money and their sanity in a practice that's only half a step higher than going down to the local betting shop, and twice as addictive.

Day trading's twice as addictive as gambling because, unlike a horse race, you really feel completely sure – instead of only fairly sure – that your skills can help you turn a small profit. You're not being greedy either – just a 3 per cent profit on the day suits you fine. And when things go wrong you always have a convenient reason to hand.

I think I've made my point. But if you really, really insist on this ridiculous practice, you can day trade more effectively by using one of the many spread-betting services that companies like CMC (www.cmcmarkets.co.uk) or Paddypower (www.paddypower.com) can offer you. With these services you're backing whole stock market indices, rather than single companies, and your profits are tax free.

Of course you want up-to-the-moment charts, and the ones you can get for nothing from LiveCharts (www.livecharts.co.uk) are better than most.

Despite some superficial similarities, know-it-all tactics such as conventional value investing and day trading are about as far as you can get from the stunning investment habits that have made Warren Buffett the world's richest man. With a net personal worth of $62 billion, the 'Sage of Omaha' shot past Bill Gates in Forbes magazine's March 2008 survey, having earned another $10 billion during a year when the American stock market had fallen by 4 per cent. Yes, the S&P 500 index had got 4 per cent poorer and Buffett had got 19 per cent richer – in the same year.

Many things make Mr Buffett such a successful investor, and if I knew even a tenth of them I'd be writing this book on the deck of my very own yacht. Nobody else seems to know, that's for sure. I can start by saying that Buffett's essentially a value investor with that essential extra streak of genius that lifts him well above the crowd. But then, I can also say that Buffett does a prodigious amount of research work that hardly anybody else is bothered to do. That he can dissect a company's accounts with more precision than almost anyone. And that his intelligence, his rigorous approach, and his cheerful resilience have stood him in good stead. But ultimately, Buffett's success is down to one very simple strategy. He believes that the market is wrong so much of the time that you can actually build a successful investment strategy out of always doing the exact opposite of what everybody else is doing.

Well, not exactly always. That's a popular misconception. Quite a lot of the time the markets have the situation sized up pretty well and although opportunities exist, they really aren't big enough to be worth exploiting. But every so often – maybe only once or twice a year – the chance is available to make a big profit out of the market's error. And so you spend your life looking out for these so-called contrarian opportunities. When you're not doing that, you sit on your wallet and resist the urge to buy anything at all.

According to Buffett:

Like I say, contrarianism takes discipline, and more than most people ever possess. Indeed, Buffett takes discipline to an extreme that few think worthwhile. Whereas you or I buy a cheap share, let it ride upwards, and then hope to sell it at its peak, Buffett says that once he's bought a share he tries his very hardest never to sell it. That's because he likes the big dividends that large 'mature' mainstream industries can afford to pay. Buffett's a secret long-term buy-and-hold fan as well.

So, assuming that you don't have Buffett's towering intellect or his humungous wallet, can you gain anything useful from the financial media to help you spot the occasions when the Emperor's tailors have sold him a see-through suit?

Indeed you can. You can, and should, do your very best to read as much as possible of the great man's thinking on life, money, and the follies of the financial world. They call Buffett the Sage of Omaha because his annual shareholder addresses at his company Berkshire Hathaway's shareholder meetings attract hundreds of thousands of people who enjoy his unfussy, down-to-earth, and often witty style.

Read Buffett's best gems online atwww.berkshirehathaway.com under Shareholders' Letters. Or make a start by looking him up on Wikipedia (www.wikipedia.com), which may keep you supplied with enough anecdotes to keep you laughing while you learn about the secrets of the contrarian/value approach he's made his own.

That's not much of a starting point for a beginner to follow, is it? Better, perhaps, to try to establish a mindset that simply isn't afraid to ask even the stupidest-sounding questions. Because every so often they turn out to be the sensible questions that nobody else thought to ask. That's what they taught me at the Financial Times, and the advice hasn't failed me yet.

I may not shock you too much by saying that most successful investors don't restrict themselves to just one of these approaches. I've got a sprinkling of LTBH investments in my portfolio, together with a couple of industrial stocks that were just too much of a bargain to miss when I saw them going cheap a couple of years ago. I have some utility shares that bring in fat dividends come rain or shine, which is a great comfort to me when the investment skies are darkening. And I've dabbled in small company shares, although without much success, I must admit.

I've been known to buy shares on the contrarian principle that a stock that everybody hates must have something going for it. That was how I bought the transport operator Stagecoach's shares back in 2002 for 27p and sold them a year later for 70p when the market had come to its senses. The one thing I've never tried my hand at is day trading. But then, I do need my beauty sleep.