Having a high price/earnings ratio is very flattering for a company, of course, because the fact tells us that the market has a lot of faith in the company's prospects for the future. So much faith, in fact, that it's prepared to pay a higher-than-usual multiple of the present annual earnings when the investors buy their shares. (For a description of how the p/e earnings are calculated, see Chapter 5 or consult the glossary.) But a high p/e has a downside for you too, because a high p/e figure suggests that you have to wait longer than other investors before you see the fruits of your labours.

Much nicer to find a share that isn't commanding such a high p/e as its fellows in the market sector, but seems to be catching up fast.

You need to do a little extra research, of course. The stock market may not be efficient but it isn't often completely stupid, so something in the accounts may be limiting your company's potential. I'd want to find out what sort of debts the company was carrying and whether anything else that doesn't appear on the trading statements was overburdening it. Maybe it's issued a large number of options or warrants that may dilute its equity in future years. Or it may be relying particularly strongly on one particular customer, or one area of the market, for most of its business.

As long as the growth looks set to continue, and as long as you can say confidently that no booby-traps exist like the ones I've mentioned, a share with a low p/e ratio relative to its peers is always worth looking at. Try checking out the chat forums on the Internet to see whether anything's going on that you aren't aware of. And if you have any kind of paid-for Internet news access that may give you an edge, this is the time to use it.

If the company has bought up one of its competitors or started a whole new business division from scratch, then comparing this year's figure directly with last year's isn't either fair or realistic. Like-for-like figures strip out these distortions, and you can usually get them from the company's postings on the Stock Exchange Regulated News Service (the official news board). Interim trading statements also draw attention to them.

Did I say 'like for like sales', incidentally? What you really want are like-for-like profits, of course. But then again, a new acquisition can sometimes take a while to bed in, and the same for a new operation to turn profitable, so the profit line not following the sales line exactly isn't necessarily a problem. The company is bound to incur transitional expenses and teething troubles that delay the curve a little.

A big rise in like-for-like profits doesn't protect you from disappointment if your company's operating in a particularly fashion-conscious area where things are likely to change dramatically from one year's end to the next – computer games, for example – or in a sector like oil or mining where prices can be very volatile. But taken in conjunction with other considerations, such a rise can point you in the right direction.

If you have access to a set of brokers' reports for each share you're interested in, then you probably find that they're set out in an onscreen format that tells you how many brokers think the share is a buy this month, how many think it's a strong sell, and how many are declaring it a hold. Plus, with a bit of luck, you have a similar set of tables from last month, and two months before that, and six months before that. In effect, you're getting a stop-motion animation picture that tells you the whole story about how the share's perceived prospects are changing.

Do the brokers ever get things wrong? Of course they do. They're only human, and sometimes they get a bit carried away by each other's enthusiasm. But generally speaking, the more brokers you're looking at, the less likely they are overall to be out by a very big margin. A website that compares the opinions of 15 brokers is much more reliable than one that only has one or two. And if your company's very small – for instance if it's listed on the Alternative Investment Market (AIM) rather than the main stock market – you may find that the only broker available is the company's 'house broker', which is hardly unbiased when it gives you its opinions.

Do rest assured, though, that for larger companies you have a good deal of statutory protection from false or deliberately misleading assessments by brokers. They'd be in big trouble if they tried to get you all excited about a share that they didn't think much of – but needed you to buy, because they had lots to get rid of. People have gone to jail for less than that.

All things being equal, the availability of online brokers' analyst reports is one of the greatest contributions the Internet has made to personal investing so far. You always need to do your own research too, but as long as you regard the reports as a shorthand set of pointers towards possible investment decisions, they're useful.

Talk about self-fulfilling prophecies! You probably already know that the FTSE-100 index is composed of the 100 largest companies in the stock market, measured in terms of their market capitalisation. But something rather weird tends to happen in the twilight zone between, say, the 99th position and the 102nd position. As soon as the company in 101st position gets 'into the zone', its shares start to put on value, so that with a bit of luck it overtakes Number 100 and makes it into the index. There it stays until the new Number 101 fights back and overtakes it again. The jockeying and jostling within what I call the zone is continuous, and the battle's often viciously fought.

Why does this happen? A company in the FTSE-100 is massively more attractive to the stock market than a company that's sitting just outside it. Loads of funds are only allowed to invest in FTSE-100 companies, for a start, and they all want to have a piece of anything that enters the magic century at the top of the market. (By the same token, they're all forced to sell as soon as the company drops out again.)

Then you have so-called FTSE tracker funds, whose managers don't even have a choice about whether to buy the company's shares. Instead, they're literally forced to buy in as soon as a company enters the select Footsie club. So as soon as a company gets close to the magic 100th position they're all getting their chequebooks out.

As you may expect, this situation causes quite a lot of disruption to the market. If every fund manager tried to buy the new entrant's shares on the day it actually entered the FTSE-100 index, chaos would ensue and not enough shares would be available. The prices would be all over the place.

So the stock market does something rather sensible. It issues an advance report, at regular intervals, that tells everyone which companies are due to be promoted to the FTSE-100 and which ones demoted. You can find these advance warnings on the FTSE's website (www.ftse.com); go to 'Indices', then 'Index Changes'. Always worth a look.

Here the trick is not so much to buy the shares, but to figure out which sectors are going up in the world and which ones are about to come down.

I talk in Chapter 3 about the importance of business cycles, which are one of the most important factors that determine how an industry's fortunes are likely to change. (For instance, smaller companies suffer disproportionately during recessions because interest rates go up at the same time as their markets are shrinking. But by the same token, they tend to shoot ahead once the recovery gets established.) And Chapters 3 and 13 explain, commodity prices tend to move in long-term cycles that move entire market sectors in pretty predictable ways.

You can't necessarily time the market to perfection, of course. Buying and selling shares (or other investments) at exactly the right moments in history is something that's best left to other people with finely honed instincts, iron constitutions, and bottomless wallets.

Consider a 'top-down' approach to investing. Look at the macro-environment – the politics, the business atmosphere, the general state of the economy – and then pick your market sectors accordingly. Only when you've done that do you set about selecting the companies you're actually going to invest in. Or, if you prefer, you can simply buy an investment trust or an exchange-traded fund (ETF; see Chapter 14) that shadows a whole market sector on your behalf. Task accomplished.

Assuming you're not going for a fund, how do you select the companies to buy from within your chosen sector? I'm inclined to use the price/earnings ratios and the dividend covers as my starting point (Chapter 5 covers both). But others prefer to look at the details of how their businesses are running and make much more finely tuned, business-oriented decisions about which companies to buy and which ones to leave waiting on the short list for another day. The decision's up to you.

Having an improving economic climate isn't always a guaranteed recipe for making a successful investment, but that situation certainly helps. If other share buyers are feeling less worried about credit squeezes and stay-at-home consumers, less chance exists of you being unable to get the quantities of shares you want at the price you want them. And less worry that you're not able to sell them easily at the right price when you eventually decide to.

Generally, smaller companies tend to enjoy recoveries the most. Consumer products, especially 'discretionary items' like sofas, televisions, and home improvements, also tend to pick up strongly.

One group of people who don't welcome a better economic environment are bond buyers. In theory at least, an economic recovery tends to suck money out of the 'low-risk' bond market by encouraging investors to sell up and switch their cash into equities instead – something that's bound to be bad for bond prices in general. You also have the problem that an economic recovery's often accompanied by a slight increase in inflation, which is the bond investor's enemy. As I explain in Chapter 6, bond investors worry that the fixed interest yields on their bonds may not amount to a hill of beans if the inflation rate ever gets too high – and so the capital value of their bonds (the actual price they can get by selling them) is likely to suffer because other investors don't want to buy them either.

But, providing that the economic recovery can remain free of higher inflation, both sides of the investment game can win.

Nothing's better than finding a share that doesn't deserve to be lying in the gutter, but it's there anyway and it's going cheap. Three or four times in the last ten years, I've come across healthy companies that have been smashed down in this way, mainly because they've been lumped together with other companies in the same sectors that have been punished for very genuine offences. Sometimes you can make 50 per cent in a few months by simply waiting for the market to come to its senses – sometimes even more.

Why do these things happen? Partly because fund managers are busy people who don't always have the time to stop and examine the fine details of a situation as closely as they may. So the babies get thrown out with the bathwater when the whole sector is sold out. This is especially true with index tracker funds (see Chapter 14), which often lop 20 per cent off the price of everything in a market sector because that's simpler than differentiating finely between different companies.

At other times, a company makes a genuine misjudgement that elicits a vast over-reaction from a panicky market. I remember seeing one company that had almost £2 billion taken off its market capitalisation because it very foolishly bought a useless, deadbeat subsidiary worth about £500 million. It could have written off four subsidiaries like that, closed them down, and simply walked right away from them all before its actions justified a £2 billion markdown. In practice, it sold off the troublesome subsidiary for a £300 million loss and its share price instantly rocketed back to normal levels.

These situations don't happen very often, but when they do they're very profitable indeed for canny investors. Chapter 5 covers investing in shares.

In practice, by the time you hear about a bid battle for a company, the chances are you're too late because everybody else has heard the same story and the share price has been marked up accordingly to the point where you may not make very much of a profit. But you can improve your chances of getting a takeover windfall just by keeping your antennae sharply tuned.

Oddly enough, some times do occur when great waves of takeover activity hit an entire market sector, and when you're in with a chance of a takeover windfall every time you buy any share in that sector. Some area of the business world always has too many of a particular kind of company, and a bit of market consolidation doesn't go amiss.

A few years ago, banking takeovers were making all the news. Then the water and electricity companies were swallowing each other up. By 2008 the focus had switched to small mining companies, which were being snapped up by larger miners who didn't have the time to dig new mines of their own. By 2015 it may be airlines or motor manufacturers or computer makers in the frame. If you can figure out first which sectors they are, you can get rich.

You may never experience anything better than the feeling of getting in on the ground floor when a company announces some amazing new discovery that's going to change the world and make its shareholders a lot of money. Unless, that is, you happen to have bought the shares the week before! In that case you've probably got yourself a bargain.

Technical discoveries are great for companies, because they attract media interest and get the company's name in the public domain. But be a bit careful with those industries where technical innovations tend to leapfrog each other and leave their rivals completely superseded. You may be laughing while your own company remains in the lead, but you're holding your head and moaning when somebody else announces something that leaves your company's products in the dust. If these sorts of industries interest you, think seriously about spreading your risks by buying a tracker fund or an investment trust that backs a whole group of these companies rather than just one. You often find that a discovery by one company attracts attention to its whole sector, so you may not surrender quite so much growth as you expect.

For pharmaceutical companies, the distance between developing a new product and actually getting it onto the market can be long and frustrating. Drug products are often forced to undergo years of testing before they're approved for use in many major markets, and you may easily find that some adverse effect nobody was expecting stops a promising drug in its tracks. If in doubt, hedge your bets by buying several contenders, because these sorts of products only rarely leapfrog each other in the way I've just described: even second-best drugs still sell well.

You can get into trouble with some people by insisting that you can forecast big currency movements, even approximately. But all the evidence suggests that's true. If you're thinking of investing in a company that always benefits from selling to one other currency group somewhere in the world, then you've got a good reason for taking the state of the currency markets into account when you try to price up that company's shares.

For example, the US dollar lost almost 40 per cent of its value against the euro during the mid to late 2000s, mainly because the financial markets didn't have much faith in the way the US economy was being run. And, more specifically, because the trade deficit and the government budget deficit were both being allowed to run more or less out of control.

That meant, among other things, that German companies had a terrible time trying to sell European-manufactured cars and other machines to the Americans during those mid-decade years. US consumers just couldn't afford the exorbitant number of dollars that were now required to buy 10,000 euros' worth of European car. So they didn't. Instead, German companies had to set up their own manufacturing plants in the United States if they wanted to benefit from America's low manufacturing costs and sell the resulting products to other Americans.

If you were a British investor who bought shares in a German company during the same period, you'd have been laughing all the way to the bank – £1,000 worth of Siemens shares would have made you an additional £300 or so in sterling terms, even if Siemens' share price in euros hadn't budged an inch during that time.

China's vast exporting companies have done well in the last decade because their currency has been loosely 'pegged' to a basket of other currencies, which has made it unusually cheap. (That's to say, it's been kept within a limited range of divergence from the average of those other currencies.) But by the later years of the decade the signs were that the renminbi yuan would be allowed to strengthen by maybe 10–20 per cent. If you're invested in a company that buys things from China you'd probably worry about this, because the goods would soon cost 10–20 per cent more, and that isn't good for business. But if you bought shares in a Chinese company, you'd see all your capital returns boosted by 10–20 per cent instead. (Unless, that is, the appreciation of the currency completely flattened its export prospects.)

Either way, you can see why I encourage you in this book to take a wider view of the investing environment, and to think hard about buying some foreign stocks. Doing so is easy these days thanks to a better international trading environment, and it's flexible and safe too. ETFs (exchange-traded funds) and investment trusts give you some excellent ways of riding the macro-economic waves up and down. With a little luck, and a little skill, and a lot of newspaper reading, you can stay positioned correctly at all times to exploit the shifts in the global currency environment. Chapter 11 covers international investing.