Owain Bennallack talks to Rory Gillen, author of Three Steps To Investment Success, about a disciplined approach to extracting extra value from FTSE 100 shares and outperforming the market over time.

You can listen to or download the full podcast here.

Owain:

Hello, and welcome to Money Talk, the investing podcast from The Motley Fool. I'm Owain Bennallack, and my guest today is Rory Gillen, founder of GillenMarkets.com, and the author of Three Steps to Investment Success, a comprehensive guide to becoming a DIY investor. Hello Rory, and welcome to Money Talk.

Rory:

Hello, Owain.

Owain:

Now Rory, our listeners, and we've got some smart ones out there, they're going to quickly home in on the fact that you have an Irish accent, I presume?

Rory:

That's correct.

Owain:

Because you're Irish, of course?

Rory:

Yes.

Owain:

There's not much gets past us in the studio. In your book, Three Steps to Investment Success, you talk about esoteric things like the euro currency. Obviously, we're here in London - we've heard of this euro currency, but we don't really use it, so we have kind of a complicated relationship with Europe.

Rory:

Well, we've heard of sterling, too.

Owain:

In Ireland, I guess you have to be an outward-looking investor from day one really, because the market's quite small?

Rory:

Yeah, absolutely, and not only is the market small, but most of the companies, by definition, have had to be international on the Irish market to grow. So I think investors in Ireland are used to dealing with international companies, and having to look abroad and understand what is happening abroad, and how it impacts on the Irish market. But Irish investors have grown up understanding the UK market as well, and they'd be very familiar, I think, with most of the FTSE 100 companies as leading names and leading brands and leading companies.

Owain:

I think equally the other way - despite those squiggly little euro symbols in the book, I found it really accessible and comprehensive and I think UK investors could get a lot out of it, especially if you were a beginner. It actually reminded me of the first book I read about investing, which was called Investment Made Easy by Jim Slater. Were you aiming at beginners? Or where were you pitching the book?

Rory:

No, it was a peculiarity that, coming from Ireland, that you had to address that market, because the audience of experienced investors in Ireland, I would say, is very limited. So when you're writing a book, you're really trying to write it to bridge that divide from the guy who needs to know there's enough chapters in it for him, if he's starting, to the guy who's a professional investor who really needs to home in on the key issues that can change his attitude, and that was an immense challenge, to bridge that divide. I very much want the book to go into the UK market, because I think it's 80% UK- written.

Owain:

And obviously you're coming out with the book, it's sort of like arriving after a battlefield, with everything in ruins all around, and it almost seems contrarian even to talk about investment to the average person. You and I know the market's been on a tear for the last two or three years.

Rory:

Yeah, that's right.

Owain:

But people out there still possibly have fears.

Rory:

Well, the message I have so far failed to get across in Ireland is that I think many Irish investors, if not most, do not actually know how to invest. They think they do, but they don't, and we've suffered more than most during this downturn, because of the catastrophic errors we made in terms of our judgement, one on values, which was largely based on property; and secondly on risk, which of course was largely based on debt, so we made two big mistakes.

Owain:

Yeah, it's almost a microcosm of what happened in the wider world.

Rory:

Yes.

Owain:

So the main thing I'd like to talk to you today about is your value-based strategy of trading a portfolio of FTSE 100 shares, and you've got a method where you show it's delivered market-beating returns over a couple of decades. But first of all, I'd like to talk a little bit more about your general investing philosophy. You clearly believe, given that you've written this book, that we can all handle our own investment decisions, but I'd say in the book it's fair to say you steer readers more towards exchange-traded funds, ETFs and investment trusts more than stock picking. Why is that? Why do you think that's the best way for investors to go?

Rory:

I think that was my judgement in terms of the majority of investors out there, what is likely to get them the best result over time. I think it's not that people can't invest in individual companies, but have grown up and have enough lessons underneath to understand that the problems occur in bear markets, and they occur on the stock-specific level. If you're under pressure, and if your strategy for buying and selling stocks is a dodgy one, or not well based, then you will succumb to the market pressure, and you'll take the permanent losses; whereas when you're with funds, I think it's much easier to ride out bear markets.

Owain:

Another thing, I think, is that people don't need to be good stock pickers to get a good result from investing, if you get the market return over 30 years.

Rory:

Yeah, well, you look at a really top-quality global equity investment trust listed on London, which was British Empire Securities, it won't have many. His annual management fee is about 0.6%, or 0.65% -- I think that's totally acceptable for his skill, and he's delivered very well, and I'd say, well, most people should actually own that, rather than trying to go out in the globe and find out which economy they should be in and which stock they should be in.

Owain:

It's interesting you mention British Empire, which I have held a couple of times in the past, and I agree it's a really interesting stock for someone who wants a bit of exposure to potentially a value-based strategy, but you and I know what those words mean. If you're a novice investor, how would you have them decide between investing by ETFs or investment trusts? Some people just don't like the idea of purely passive vehicles. I think in their stomach they feel that letting a computer make a decision for them is wrong.

Rory:

Yeah, and that's where it comes into - I mean, I recognise the advantages and disadvantages of both, and I don't actually have a preference for one over the other. I think at times investment trusts can be the only thing you should buy. If the discounts are wide enough, and if the fund manager has a clear investment strategy that's honed over time, I think there's no question, investment trusts can be very attractive. On the other hand, we all know what the statistics tell us, that the average fund manager is underperforming. Given costs and given a lack of strategy for most investment managers, then I think ETFs have a part to play, a big part, and in particular the intelligent ETFs, which is the fundamental ones, which have a slight bias towards value - just a very slight one, but it's enough. Certainly on my own website, I started my website a couple of years ago, after doing stock market training course for several years, because I recognised people needed more than the one-day course I was offering. They needed their hand held after, and when I left the company I was with, which was Merrion Capital in Dublin, I tried to decide, how can I actually deliver that hand-holding? I looked abroad, and I said, well I subscribe to seven or eight investment newsletters in different areas that I don't know about, and I said, well why can't I do one? So I did, and I said, well, in the internet age, it has to be online, doesn't it? So effectively what GillenMarkets is, is an online investment newsletter, and I cover stocks and funds, ETFs and investment companies. I only cover funds that are quoted on the stock market. I've absolutely no interest in stocks or funds that are not quoted, the unit trusts or mutual funds or whatever, for the simple reason, the cost to hire and the administration is more onerous. Certainly it is in Ireland - I'm not suggesting the administration is as much in the UK, given the development of platforms.

Owain:

I think I'm right in saying that, where there's been an unquoted fund and a quoted equivalent; possibly they're not quite equivalent, but where there's been the same manager, generally the investment trust has outperformed, partly because they can use gearing, and that sort of option.

Rory:

Yeah, and the costs are actually lower, and they don't have all the marketing and distribution costs to go with it. I tend to just keep the world simple. There's a huge choice of funds listed on the London Stock Exchange, and there are no investment companies listed on the Irish Stock Exchange. There actually was only one - it was the Gartmore Irish, run by Gervais Williams.

Owain:

Oh, he's left, hasn't he?

Rory:

Yeah, they shut that down when he left, and they merged that into a Henderson European fund, I think, in 2011 or '12. But that was the only one which I think it is such a pity.

Owain:

Is there any way to just capture the broad Irish stock market? Is there an ETF available?

Rory:

There is an ETF, but I wouldn't call it abroad. By definition, it follows the market weightings, and therefore it would have had a big slice of Elan, huge slices of the banks. I always felt, and we felt at the time when I was very interested, it was a pretty flawed product, whereas you could pick out the great companies like Kerry and Ryanair, and CRH, DCC, Fyffes - maybe not so great, but coming back; Glanbia. So there's lots of good companies that you could cherry-pick yourself, and put a proper portfolio together, without having to be top-heavy.

Owain:

I think when people think about Ireland, and possibly they should think about this with the UK, but we seemed to have escaped the worst of it, they would think about a property slump, as you mentioned earlier - the sort of boom and bust of Ireland; I thought it was very interesting that you had a chapter in the book about property. Why do you think it is that people find property so much easier to access mentally? They understand property?

Rory:

No, absolutely - it's the right question. It's because, I think, bricks and mortar, if you don't understand the principles of investing, we have been brought up in society, and the UK should have known better, because it had its property crash in 1990 to 1992 - we didn't; but people are brought up on bricks and mortar, and there's no management to wreck that up, so the worst you can actually do is overvalue it, or add too much debt. But you don't have management there making acquisitions or whatever; it is what it is, and it trundles along, and it should rise along with the economy, as long as rents are rising, etcetera, and incomes are rising.

Owain:

I think that's the case. We all understand - if I say to you, I'm renting out my flat for two years, and I've got a mortgage on it, anyone in this office knows what those words mean. But if I say, this fund is trading at a discount to NAV, but it's quite high beta, so I think it will come back, people just ...

Rory:

Or Coca-Cola has an earnings yield of 5.5% - what's that mean?

Owain:

Yeah, people just look askance. So maybe it is that we just learn from an early age what those words mean. Just as a quick aside, a friend of mine and me have been considering going over to Ireland, and picking up a buy-to-let property. Should anyone be listening to this be thinking that now perhaps Dublin is a better place to look? Or do you feel it's still coming up?

Rory:

Yeah, well, I think the positives of this downturn is that we, as an economy, and a people, I guess, that the actions to correct the hell of a party were taken quickly. Now, of course, the government went bust in 2008, so it had to act very quickly, and it did, and I think we are an open economy, and we do think like the UK thinks. We don't expect everyone else to bail us out. We don't expect freebies. So the actions were taken, and they were taking quickly. Now, there's still a big over-supply, but at the end of the day, and the way I think about things, is value's always more important than trying to determine supply and demand. I think you can easily pick up rental yields on commercial property in Ireland of 8 to 10% at the moment, and in good quality locations. The reason for that, of course, is because the finance is not available, and therefore there's going to be an imbalance for a while, but with the 10-year bond yield having drifted down below 5%, it's an excellent lead indicator that the finance is becoming available.

Owain:

Residential stuff, would you say also?

Rory:

Yeah, and I don't think you're going to get those kind of yields, but I think, if you know the right locations, and if you're prepared to go in now, you may have missed the discounts that were there, that panic-seller - I think those are probably, certainly they're gone in Dublin, in the good areas, but you'll certainly get good quality and good value yields around 6, 6.5% or there.

Owain:

OK, that's an extra bonus for doing this podcast today - I'll go and do my research over there. So, let's quickly turn now to your suggestion for how individual investors might go about trying to beat the market through methodically buying and selling, I think the word in investing is a mechanically-selected portfolio of FTSE 100 shares, and this is where you use a strategy which is driven by the numbers, not by personal analysis as such. Before we go into the details, why do you think that looking at the numbers, as opposed to having an opinion about management or the products, why is looking at the numbers superior?

Rory:

It's an excellent question. I used to head up the institutional research side of Merrion, so I understand individual company analyses as good as the next fellow. But I read, like I'm sure many people, James O'Shaughnessy's book, Invest Like the Best, back in, I think I read it in 1998, later than when it came out. I was hugely influenced by that - the concept that it's actually the underlying numbers that deliver the subsequent returns. I began to see then myself the flaws - that's probably too strong a word, but the flaws in individual company analysis by individuals who might have their own biases inbuilt. And so I think behavioural finance, in our decision-making, is totally underestimated, and I would have been influenced by that, or I would have been guilty of that myself in the professional game, in terms of preferring a company because I'd met management, all that kind of stuff. So I was hugely influenced, and I didn't come out of that thinking, well, I'd have to be value investing, because I, and Jim Slater in the UK, who I do know and I do write to, and he gave me a testimony for the book - I back-tested Jim's approach on the UK market when I stripped down, from all of what he says, strip it down to just the quantitative - the things that you could measure in how Jim picks stocks, and it was just phenomenal.

Owain:

And this is the Zulu method?

Rory:

Yeah. I took it out of the Zulu book, and I stripped out his sort of chairman statement-type stuff, and just got down to the bones of it, and I picked five or six criteria, and I took company refs, and I went back from 1999 to 1994, and it was just an absolute winner. Actually, he has the right criteria for growth stock investing. His approach, of course, is a difficult one in bear markets, because, as he says himself, you're always passing on the baton, and good companies that are growing like the clappers in share price terms can just go into a tailspin in a bear market. So I eventually gravitated to what was actually more robust, was actually a value-based approach on the same principles of picking in a disciplined quantitative way.

Owain:

Yeah, so let's look at that method. I mean, to paraphrase it, people can get hold of your book, and you can get an extra sale if they want the exact detail. But you're essential suggesting that one buys the top 15 shares with the lowest PE multiple of the top 75 companies, by market cap from the FTSE 100 - hold for a year, and then religiously, I guess; religiously possibly is a loaded word, but just maybe I would say a prayer perhaps, but sell the lot, and then repeat the exercise.

Rory:

Yeah, and actually it only takes about half, so 40 or 45% of sales is the turnover, if there's a lot of stocks that are still there. So it's not 100% turnover - it's actually quite a good deal lower than that.

Owain:

So presumably you'd rebalance, would you?

Rory:

Yeah - you don't always have to rebalance. It's rebalancing in a pure world - you can skew it slightly. The principle is correct - you don't have to apply it religiously.

Owain:

And then the price-to-earnings ratio that you're using - is that historical, or is it forward-looking?

Rory:

In the case of the study that I publish in the book, it's forward-looking, because the database I use, and the reason for using the database I did, by the way, is because it, Company REFS, which is the database, which is actually Jim Slater's own input, that was first published in November 1994. So I had real-time data at that time, so when I started the study, I started it, I think, in 1997 or '98 - I took it back a few years, and then I just continued to roll it. But what I have is top-quality data that can't be undermined, whereas back-testing is a tricky thing - it depends on your database, and databases can be - the data might not exist at the time. So it's important you have a good-quality ...

Owain:

Garbage in, garbage out, as the programmers used to say.

Rory:

Yeah, and it is a trick area, and would have been very conscious of that, and knowing all the flaws about looking backwards, and I would have taken time to make sure that was taken account of.

Owain:

And you didn't find there was a big difference between whether you used historical or forward PE?

Rory:

No, I did use both at one time, and then I left it and kept with the forward ones, because that's what Company REFS uses - it uses a 12-month rolling forecast, which I think is good.

Owain:

And just the last point on the technicalities of the method, because it might sound a bit odd to people - the reason for using the top 75 is just to stay away from the kind of hubble and bubble at the bottom, where people come in and out of the market all the time?

Rory:

Yeah, I just started off, when I started the study in 1997/'98, I just said, well I'd like a stable body of companies, and I said, a lot of companies are coming in on the FTSE every quarter, or whatever it is, so I just chose 75. Now, there's nothing perfect around that, and in fact if I was to start it again, I'd have taken 150, because I've understood that actually top 15 is probably not wide enough - you can be prone to having too many companies in the same sector within a 15-stock portfolio at the top. Hence over time, I gravitated to the sector 15 approach, which allowed me to dip into the top 30 stocks out of the top 75.

Owain:

And that would be where you would say, take one bank, one oil producer?

Rory:

Yes, and I think the principle is, it's just diversification. Don't get over sector-concentrated, because it is actually, the value is the key, and the lower the ratings, the better the yields - all that kind of stuff makes a difference.

Owain:

So I guess people listening to this, and thinking, well, show me the money, and as I understand it from your back-testing that you decide to do in the book with the top 15 from 75 method, you've seen a return of 11% a year between 1995 and 2011, versus 7.4% from the FTSE 100, so that is substantial.

Rory:

Yeah, that is substantial. When you're dealing with what should be the most efficient area of the UK market, a 3.5 to 4% across the board, not every year obviously, but over time, that is substantial, when you think that it probably has beaten every UK fund manager who's running a FTSE 100 fund.

Owain:

It would make a massive difference to your life, if you can get an extra 3%. I can't do the maths in my head, but it would probably double your returns, or something.

Rory:

Yeah, and all you have to do is accept that, look - you're going to be more volatile in the market. At times you will do worse, and you have to accept that.

Owain:

Because the key, with these strategies, tends to be that there's a terrible year eventually, and that's presumably one of the reasons why the strategy endures. Even if people aren't following the exact strategy, whatever the strategy is highlighting, people are bailing out of. Again and again, you see with these strategies, the next year tends to return and really outperform.

Rory:

If there's a theme through my book, it is that people, investors in general, and I don't think it's just private investors - investors in general mix up the temporary declines in value with the threat of the permanent loss, and all of us need, in investing, a strategy to offset that threat. I've got used to the one that suits me, and it doesn't suit everybody - it suits me, and I like to put it out there, because I like the teaching as well.

Owain:

In your book, just because I've mentioned that I've seen similar, you mention the Michael O'Higgins' work, where I think he called his Dogs of the Dow - certainly he brought it to popular notice, and that was about 20 years ago, and then Dreman in the Nineties also came out with similar research. The obvious thing that one would wonder about with these methods is, how they can endure, when Dreman, Higgins, yourself now, are out revealing the secrets of the world? How can these things, how can they endure? Why is the market not wising up to that?

Rory:

I think it's just the basic behaviour of finance. I think David Dreman had a very, in his 1998 book, Contrarian Investment Strategies, I think he did a great analogy, when he says, look - if you go into the casino, and you show them the red room, the red door and the green door. You tell them the winning hand is in the green door, and they keep going into the red door. I think people don't have either the timespan or the concentration or the emotional, the understanding that actually we're very flawed when it comes to emotions, and we can be as clever as hell, but still make a complete botch of it in a bear market, because it's behavioural finance.

Owain:

I guess the other thing is, because this is intrinsically a strategy that homes in on the low PE companies, there's always going to be low PE companies. There are always going to be companies that fall out of favour, by definition.

Rory:

Absolutely, yeah. It's not unique to the UK market. I've done the study on the European markets, and I did it on the EURO STOXX 600, which is a bit of a misnomer, because there's only 320 companies in the index.

Owain:

I did warn you about the Europeans at the start of this podcast!

Rory:

So it works similarly, and works similarly from, I think I repeated that study from 1995 to 2006, which isn't enough data for myself, and I wasn't all that happy with the quality of the data. I got it from a few stockbroking companies, but nonetheless it validated it to the extent that it was replicating what I'd already found from a good quality study in the UK.

Owain:

And on the subject of variations on a theme, you also mention in the book similar screens based on low price to cash, and I think also you have a yield screen, and those showed some outperformance as well. In the book, did you elect for PE, just because that's so accessible, that data?

Rory:

Yeah. In the initial, as I mentioned, the initial version of the book, I covered all three, and then I decided to toss it overboard, and I just pared it back, and I said, well - choose out of the three, and I just chose the price to earnings, because I think people identify with that a little bit more. The high yield isn't actually, and surprised me, it's not actually the outperformer. I think probably because we've gone through a cycle where the banks went bust, it has depressed the high yield one in particular. But if you look at the three approaches that I had in terms of using one of those metrics, high yield or price to earnings or price to cash, you'll find that, as long as you're dipping across the sectors for 15 stocks in the top 30, out of that basket of 100 or 75, you'll find that the returns across the three are reasonably similar. Some are between 11% compound per annum to about 12.5.

Owain:

Yeah, I think the sector diversification is an excellent addition. You see ETFs in the US from some of the fundamental ETF providers, where instead of market weighting, an index, but changing to equal weighting.

Rory:

Well, as we're on that, the FTSE 100 since 1995 has done 7.6% compound per annum - that's including the dividends obviously, but an equal-weighted FTSE has actually done 9.8, so that's actually 2% per annum for an equal amount. I'm surprised there isn't an equal-weighted ETF by some of the providers out there, and God knows if I was an investment bank, I'd have done it straight away.

Owain:

Yeah, I wonder if - presumably they'd be slightly higher cost?

Rory:

Slightly higher, but it's a very liquid market. There is a huge variation between obviously Shell and down to Old Mutual, or something like that. Perhaps that has some bearing on it, but the smallest company in the FTSE is two-and-a-half billion. That's more than liquid enough.

Owain:

So just briefly, I guess we've sort of addressed this a little bit, but what would you say to a reader who said, well, that's great, but I can't invest in 1995 - I'm investing now. So this back-testing of this data is very convincing, but we've got to invest in the next 10 years.

Rory:

Well, I think the key of this one is, it's not actually back-testing. When I started, it was 1997/'98, so I did drag it back for two or three years, three years maybe. Then I've just rolled it, and continued it forward since, and invested accordingly, and I've done my seminars for years based on this. For those who want direct stock picking, because at the end of the day, it's all about control of risk, and for most people, control of risk can come through funds; for others who insist on stocks, they can either really be a very savvy analyst themselves, or they can accept an approach that controls the risk for them - that's the key.

Owain:

On the subject of risk, you do have a chapter in the book, and I'll probably get shot by The Motley Fool police if I talk about it, because it's a little bit about technical analysis and market timing, so I don't want to go too much into that, because I think we respect that some people use it, but we're more fundamentally-based. But in general, do you think that the average sort of listener, private investor, is well-equipped perhaps to just look at the broad valuation of the market, and say, this year I'm going to put a bit more money in than last year? Or do you think, even in that scenario, they'll tend to be in at the wrong time?

Rory:

I think there's a place for technical analysis, to the extent that it measures human psychology and behavioural attitudes. At times, when markets are turning, we're either euphoric or we're depressed, and I think to help us, prompt us to make a decision, whether that's to put more money in, or to hold onto existing holdings, I think there's nothing to beat the Coppock indicator.

Owain:

I was fascinated in your book - I'd never realised before that the Coppock indicator which, to summarise for listeners, it looks at when a market's about to turn, based on some technical data; that the chap who devised it asked a priest, I think, about the average length of bereavement, and he said it's about 14 months.

Rory:

Yeah, that's the history of it.

Owain:

And then they apply that to bereavement in the market.

Rory:

Yeah, it's psychological, you see. I just found, when you look at the statistic of the Coppock, it's not perfect - nothing is, but it has a good record in the big developed markets. When you look at the one, three and five year returns, following Coppock buy signals, they're not just good - they're astounding. Now, the other one that I have got to like a lot, given that we've had such tremendous volatility in the markets, is the capitulation indicators, where it's measuring panic, because you can buy panic. You can be a fundamental investor, and it can help you to stay the course, or you know the timing to add something.

Owain:

I think the think with the panic indicator, a lot of people can get a sense of that by looking at their portfolios in the middle of a bear market, if it's got a nought less than it used to have.

Rory:

But it's to measure that time when everyone exits together. On my own website, the last really big capitulation event occurred in August 2011, and I understood it at the time, and hopefully I protected lots of my guys, who were heading for the exit - no, no - stay the course. It is actually a buy signal, not on fundamentals. Now, as it happened, the European markets at that same time gave one a very strong technical buy signal, but also the fundamentals were astounding, in that your ten-year average earnings ratio was as cheap as it was since the late 1970s, on both Germany and France, and therefore you'd both fundamentals and technicals on your side, and I felt that was a home run.

Owain:

Well, absolutely - if everyone else is selling, whether they're selling houses or furniture, or antiques.

Rory:

Yeah, provided it's good value.

Owain:

Yeah, absolutely - that's the time to buy.

Rory:

Because you could have got those signals wrong in 2000/2002. In markets, there still wasn't much value around, but they were capitulating, and even the Coppock signal got it wrong, because it gave a buy signal, but there wasn't enough value.

Owain:

Yeah, that's the problem with these signals. It's like the equity to bond yield ratio - that signal looked like it was screaming buy for shares in about 2009, which in fact it was, of course, but it's continued to say, screaming buy, screaming buy, because the bond yield is so depressed.

Rory:

That's right, yeah. I used to rely on that one myself a bit, until I understood why I actually shouldn't rely on it all that much, and I think the earnings yield versus the bond yield is perfectly valid, so long as the earnings are straight and reliable. I've just come to the view myself that there's no point, because it doesn't work. It might work in theory, but it doesn't work for you in the market.

Owain:

There's a lot that you could say about the markets, where the theory doesn't necessarily match.

Rory:

Yes, exactly, yeah.

Owain:

So, I'm curious, because we've spoken a lot about these portfolio methods, but you're obviously a man with a lot of passion for the markets. So I presume you look at individual companies, and I was wondering if, while we've got you in the studio, if you've got any sort of FTSE 100 company that you particularly like at the moment?

Rory:

Well, I've been a big fan of Next, and sometimes on my own website, if I'm listing the stocks that match the FTSE 100 value approach, say the P/E, and I list those stocks every month, then I might pick out one or two to provide a bit of analysis for my own subscribers, but I freely say that my view on the stock is not worth listening to, because I don't want to influence the actual approach itself. But nonetheless, I understand what subscribers and investors, and I'm the same myself, that we all love to know the detail around it, even if it doesn't help our investment decision. I was very struck with Next, when I looked at it in 2010, I think I looked at it. I mean, while I'm not a shopper, and I couldn't tell you why Next is a winner from a shopping perspective, I'm sure our prospective wives or partners might tell us that, but the returns on capital are consistently astounding. The amount of share buybacks that allows the company to do, and the discipline that they're adhering to in doing that, means that it's a huge attractive proposition. There's some sort of a franchise there that I don't understand.

Owain:

That's the incredible thing, when I looked at them for us - in fact, for The Motley Fool for a special report we did, and I was struck that one of the only companies you ever find who buys back shares, when the shares are not particularly cheap, and yet it does work, because they've done it for years. They've bought back their shareholder base by about 50% or something insane.

Rory:

Well, there's a lot of Irish companies started buying back their shares at the first sign of the downturn in 2007, and they were mortally wounded as a result. So the key for share buybacks has to be that the company is sufficiently confident, on a three to five-year view, on their cashflows. If they're not confident, they shouldn't be doing it, because all they're doing is taking risk.

Owain:

The other thing with Next is, they have that Next Directory, which is almost a mini-Amazon, it seems like sometimes.

Rory:

Yeah. I think the management recognise that their ability to grow outside the UK (don't even mention Ireland), outside the UK which is their big market, they know there's a risk, and therefore buying back shares makes sense.

Owain:

OK, so I have a copy here of your book, thank you very much - I have two copies, one which I'm going to keep myself. In fact, I have another one which I'm prepared to give away, and so I thought we'd have a competition, and I'm going to ask a very easy question. I'm going to ask listeners, if they'd like to win a copy of this signed book from Rory, I'm going to ask: what is the biggest bank in the FTSE 100? I'm presuming you know that one, off the top of your head?

Rory:

Of course!

Owain:

We'll see if our listeners are as clued up. So if you wish to win a copy of Rory's book, then send an email please, with the subject line, Book Competition, to moneytalk@fool.co.uk, with the answer to the question: what is the biggest bank in the FTSE 100? And you may well win that book, you might not - we've only got one, but certainly someone will be happy to get that. Okay, Rory, that's been really fascinating. Now, at Money Talk here, we like to end each podcast with a quote, and I was spoiled for choice - I'm a big fan of Irish literature actually. But in the end, I went for Oscar Wilde, who's possibly a bit of an obvious one to go for. Mr Wilde said: "When I was young, I thought that money was the most important thing in life, and now that I am old, I know that it is." So you could see that quote quite cynically, but I think in some ways, you could see it as quite wise, and that everything we aspire to do, or perhaps not quite everything, but most things are enabled with money. We have to take responsibility for that in our lives.

Rory:

I think that's right - absolutely, yeah.

Owain:

OK, well thanks very much for your time today, Rory.

Rory:

You're welcome.

Owain:

Don't forget, everyone, to look out for Rory's book: "Three Steps to Investment Success". Don't forget you can enter the competition, and tune into the next Money Talk podcast on iTunes, or you can always listen to it on Fool.co.uk to hear more from me. So on that note, goodbye, and happy investing!

If you're keen to earn great returns with small caps, this free Motley Fool report -- "10 Steps To Making A Million In The Market" -- could help you on your way. The report highlights how choppy markets can still provide the big winners to take you to that magic million. But hurry, the report is available for a limited time only. You can download the report by clicking here.