Developing a sound investment process is a personal challenge. My approach has been to look to the best investors in the world, the true masters. I have chosen and studied them with great care; reading and listening to them and trying to glean all I can from them. This is how I have gone about developing my own approach, which is the great ‘secret’. This approach has been refined by the experience of day-to-day life, which has helped it to take shape. This is how you develop firm and coherent beliefs, which enable you to be courageous and turn your back on the herd; being patient and accepting uncertainty and, ultimately, keeping your head when all about you are losing theirs.

Armed with an appropriate intellectual framework and having developed the necessary personality traits for a sound investment process, we can attain our goal of preserving and increasing the purchasing power of our savings.

The Austrian School of Economics provides us with such an intellectual framework, offering an accurate description of reality which provides us with a solid foundation for analysing economic developments. It's an economic analysis that won't predict a country's economic growth or consumer behaviour, but will give us a basis for distinguishing the implications of market interventions and prepare us for dealing with them.

The markets work reasonably well since they represent no more than exchanges between individuals acting freely. Some market participant or another will always recognise when there is disorder in the market and, through their actions, address it.

This provides us with the basis for approaching the investment process, which is all about finding value where others won't or can't see it.

Real assets, particularly shares in listed companies, are the best at maintaining the purchasing power of our savings over the long term. The stock market is not the realm of speculators, as I used to think when I was young. Instead, it's a place where all mankind's virtues and miseries play out together – our true selves – and where, thanks to the analysis provided by behavioural science, we can find the irrational (or emotional) side of human beings, enabling us to obtain returns that give us peace of mind and independence in the future.

Indeed, the focus of our analysis is mankind itself. The businesses that we analyse are created and developed by people, who sell their products and services to other people. We're not analysing strange beings or mythical or legendary markets, we are analysing people.

Some people manage to create and develop exceptional businesses, which are difficult to reproduce. Others are unmitigated failures. The former are of more interest to us for potential investment, especially when circumstances mean they can be acquired at accessible prices. These are the businesses that should be the focus of our time; analysing their competitive position and resilience to future developments.

Doing so requires us to have a strong hold over our most primordial emotional urges. We have to be patient, inquisitive, modest, and bold. Patient because it may take some time for others to wake up to what we are seeing, which is why it is necessary to have a long-term perspective. Inquisitive because we have to be attentive to everything that's going on around us. Modest because errors are common but the key thing is to draw the right conclusions from them. Bold because sometimes we will appear like a suicide driver, travelling in the opposite direction to the flow of traffic.

And consistent. Step by step, day by day, like preparing for an ongoing exam which obliges us to be locked in ceaseless study of a continually expanding and shifting subject matter.

ASSET MANAGEMENT

Asset management is shifting towards passive management, buying into an index at low cost and following the markets. Few active asset managers obtain better results than the index and, in the main, most don't deserve the extra fees they charge.

The development of ‘passive’ modes of investing will create some very exciting opportunities for those of us who believe the market isn't always efficient. I repeat, not always. The market tends towards efficiency, but is incapable of always being efficient.

It's affected by constantly shifting consumer tastes and technological innovations which offer us previously inconceivable products and services. This makes it hard to reach a point of full efficiency: the market is always trying, moving in that direction, but it never gets there.

We mustn't forget that the market is made up of people continually making decisions about how to act, and we have seen that these decisions can be absurd, illogical, or simply poorly informed. People make errors; investors are human too, and just as capable of making them.

Therefore, we will always be able to capitalise on opportunities and the development of passive management means a bigger part of the market will be essentially ‘brainless’, buying by default what everyone else is buying. ‘Herd’ behaviour just became official. As frequently happens, something that makes sense for an individual to do lacks logic when generalised. The more weight passive management gains in total management, the more opportunities there will be for active managers. And we'll be there aiming to make the most of them.

Stripping this whole story to the bones, there are essentially two ways to take advantage of the markets – one difficult and one easy.

1. The difficult way involves predicting volatility and short or medium-term market movements. We have seen that this is practically impossible in the short term, although it is conceivable to develop some feeling for the long-term trajectory of certain economic factors. An example was Spain's credit and housing market bubble. These long-term predictions require us to acquire a deep insight into economic processes and we can work on improving our knowledge, but ultimately it will seldom be of real use and the chances of success are limited.
2. The easy option involves making the most of volatility. This is quite a lot more attainable for any investor, since it comes down to developing the right personality attributes to capitalise on market movements: pushing the boat out when others are fearful and reining it in when others are being greedy. And, above all, being patient.

The second path ought to be the main approach, with a dash of the first when possible. We will never know how the markets are going to perform, but we must know how to react when the market behaves in a certain way.

MY OWN FUTURE

From time to time one of my children will ask me exactly what it is that I do. My profession isn't very clear to them, since the only thing they see me doing is reading and little else. We rarely ever discuss the issue at home, but when we do I tell them that I am responsible for looking after the savings of people who trust in us, so they can enjoy peace of mind in this area of their lives. I tell them it's a very gratifying job.

Sometimes I am asked in one of our conferences, or personally: How much longer are you going to keep working? Won't you tire of all this? They are fair questions, since we've saved enough to no longer have to work. However, there's a simple response, as already mentioned. How is it that I'm going to stop ‘working’ when:

• The work is stimulating and varied, I do it reasonably well, it fits my personality, and it enables me to satisfy an element of temerity that all of us have (or at least I do), with measurable and objective results.
• You are providing clients with a service that they struggle to find elsewhere and which is therefore valued by them. They value it because the returns come with a degree of trust and composure, which enables them to feel that they have this part of their life under control. For me, this pushes it beyond mere work.
• It's valued by clients and therefore extremely well paid, which reinforces the most precious thing that money can buy – one's independence.
• It fulfils a social role, like all companies and people who generate profits.

  It is worth remembering that it's important to offer a service to society using the fewest resources possible; the more profit the better, since either we will be offering a highly valuable service or using very few resources, or a combination of the two.

  When the competition comes alive to these profits, they will do everything in their power to bring them down to normal levels.

  Another ‘social’ function is increasing market liquidity, acting as a counterparty: we buy what nobody else wants and sell what everyone is after. This liquidity not only facilitates greater price stability, but it also actually supports the process of financing investment, which is key to improving everyone's living conditions.

• With the profits that we gain, we can help other organisations or people who are struggling to achieve their objectives, who our conscience obliges us to help, and who lack the resources to do so.

Furthermore, as previously discussed, I already have a sense of duty to my family, friends, acquaintances, and strangers who have put their trust in what we do. I believe that life needs to have some meaning to it beyond the immediate, and for me this meaning comes from doing a good job, providing peace of mind to people around me with regard to their savings, and using the profits I earn to support those who might be in need.

Moreover, during the most exhilarating moments – when you sense that a very promising investment is within your grasp and that you alone have the right personality type to go for it – a sense of flow descends upon me, time and space melt away; I am convinced that I will keep doing it for a long time to come. At least until I feel the need to write a second book.