It pays to be a market follower, says Ko Barclay, chief investment officer of Emblumoven

My investment philosophy can be summed up simply as following trends. This is in contrast to most fundamentalist investors—and I used to be one—where bets in the market are about predicting what the market is going to do. My own experiences trying to predict the market have been frustrating. I realised I was trying to fulfil two basic needs of every investor; the desire for certainty and the urge to be right. It was ego-based investing. The switch from being a fundamentals-driven trader to one who follows trends isn't easy. 

We often trade in accordance with our beliefs about what a particular stock or security will do. If we think that Marks & Spencer is a good retailer and that its balance sheet and prospects look good, we buy that stock. We rarely short it because that would conflict with information we already have about the company. We don't believe the price will go down. If the price starts to fall, we are in conflict because our beliefs about the company don't match reality.

Broad concepts such as "cheap" and "expensive" don't help. These are just relative ideas judged by perceived value. The hard lesson I learned early in my trading career is that "cheap" could always become cheaper and "expensive" would often cost even more. How many times have you met investors who were too scared to buy a stock or commodity simply because the price had already risen 50 per cent, only to see the cost jump 100 per cent? They then pile in because they don't want to miss out on the profits everyone else is making? Indeed, this is the basis of the recent financial and property bubble. To coin a well-worn adage, markets are driven by greed and fear, which is why I follow trends, but also tightly manage risk on each individual position and at the fund level.

The biggest mistake an investor can make is thinking there is a link between the price of a security and fundamentals. Once a stock or security is quoted in the open market, speculators can take the price wherever they want and it's human nature to want to explain why a stock is trading at 800p or at a multiple of 40-times its earnings. Post-rationalisation is one word for this phenomenon. Confirmation bias is another term used in the field of behavioural finance.

The secret to becoming a good speculator lies in understanding the origins of the Latin word, speculari, or "to spy out". In other words you need to remove the ego and simply become an observer and react to market changes rather than trying to predict them. I don't study fundamentals anymore and I get just as good results—better even—by simply watching the price action.

The great thing about trend-following is that it will work on any security. This means I can manage a portfolio that is truly diversified (called a global macro portfolio) and includes equities, foreign exchange, commodities and bonds.

The world is now a global village and it doesn't make sense to limit your investment universe to the UK. You only have to look at the plight of the pound to understand this.