MANY capital growth investors could be forgiven for beginning to lose faith in the premise of investing in the stock market.

Despite an extremely strong bull-run between March 2003 and October 2007, over the past ten years, the UK’s FTSE 100 Index is down approximately 33 per cent.

While historically, investors may have favoured a passive investment approach, buying and holding stocks for many years, more recently this buy-and-hold strategy has often failed to deliver the kind of capital returns shareholders have come to expect.

As markets will always rise and fall, a better strategy is often to buy an undervalued stock which has recently fallen, and sell six to 12 months later, once the company’s share price has recovered. Although this strategy relies on a little luck and an almost impossible ability to time markets correctly, the returns available to shareholders can be quite astronomical.

It is often said that the time in which to buy shares is when the prospects for the company or the market look at their worst.

Although it seems relatively obvious to buy shares when the market is low, rather than when it is high, this is rarely a strategy undertaken by private investors.

While institutional investors are better equipped to time the market to their advantage, private investor psychology often prevents individuals from investing when the newspapers are full of doom and gloom. This is also true for when it is time to sell, with many clients preferring to hold onto a stock which has seen a significant rise, in the belief that this strong performance will continue indefinitely.

Between 2005 and 2007, a very good market strategy had been to split your investments across numerous companies and sectors, which you believed could be susceptible to a takeover approach.

Barely a month went by which did not see increasingly large UK companies being taken over, which helped to provide a very quick positive return for shareholders.

A new strategy for investors could now be the purchasing of those companies which look at risk of going bust. This normally results in the share price of the company falling to a ridiculously low level, as shareholders remove whatever little money they have left, rather than risk losing everything.

Although this strategy depends on the phenomenal ability to time your trades correctly, the returns which can be achieved are truly eye watering.

Although it maybe hard to believe, if you had invested £1,000 each into four bombed-out companies at the right time – Pendragon, Bank of Ireland, Taylor Wimpey and JJB Sports – it would have been possible to increase your initial investments to £69,175 in a little over six months.

This strong rise comes from the fact that all four companies were widely believed to be very close to going bust, and were only saved by a change of circumstances while teetering on the brink.

Pendragon, the used car company, saw its share price increase from 1.40p to the dizzy heights of 38.50p between December last year and Friday of last week.

This constitutes a rise of 2,650 per cent, which would have increased the initial £1,000 investment to £27,500.

Although no one would say this strategy was easy, and while it is possible that the company may go bust, few would disagree at how tempting it can be to spread a little money across those companies which could either disappear completely, or recover tenfold from the bottom.

Michael Rankin is an investment manager in the Teesside office of Brewin Dolphin, and can be contacted on 0845-213-1340. All prices quoted in the article are from public sources. The views expressed are not necessarily held throughout the Brewin Dolphin Group. You should bear in mind that no investment is suitable for all circumstances and it is important to seek expert advice if in any doubt.

Brewin Dolphin Limited is a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority.