Derek Pain: Hold on – it's not the end of the cult of equity just yet
No Pain, No Gain
Saturday 11 September 2010
Many alleged experts are taking the view that the cult of equity is dead. It is highly unlikely, they opine, that we will again experience the growth in share values that has occurred since the 1950s and a much more subdued atmosphere will envelop the stock market in the years ahead. I disagree. True, the next couple of years may prove difficult, but I remain convinced that long-term progress will be achieved and the stock market will remain a happy hunting ground for the legions of buy-and-hold investors.
Of course, hyperactive players are not greatly concerned whether the equity cult survives or not. They – hopefully – reap handsome rewards from their frequent trading, although the only sure winners are various City elements, pocketing charges, and the Government. But, for the buy-and-hold brigade, the future direction of shares is a vitally important issue.
It was a fund manager called George Ross-Goobey who in the years after the Second World War established what became known as the cult of equity. He conducted the pension fund of Imperial Tobacco and took the then-revolutionary decision to invest largely in shares rather than government stocks and fixed-interest bonds. His foresight was richly rewarded as equities embarked on their upward journey.
The City has changed dramatically since those days. Indeed, Imperial Chemical Industries (ICI), the leading company of the time and the then-bellwether of British industry, is no longer with us, having succumbed to a takeover bid in 2008.
I have been in and around the City for most of the equity-cult days. There have, of course, been some wounding setbacks. The early 1970s and the 1987 storm spring to mind. But despite violent retreats, shares have overall made spectacular progress, hitting a peak in the dotty.com madness at the turn of the century.
The simple fact that they have not achieved new highs since then, and are currently well below their record level, is one of the main planks of the doubters' argument. Low trading levels, many institutions reducing their equity content, and the strength of bonds and alternative investments, are other reasons offered. However, as I pointed out last week, equities are not without attractions, particularly on the yield front. And I bet old Ross-Goobey would still be enthusiastic.
The No Pain, No Gain portfolio is a buy-and-hold exercise. I am often accused of falling in love with a share and, consequently, failing to sell at signs of trouble. There is little doubt that I have retained shares when a more active investor would have sold. Sometimes, such an attitude has paid off; on other occasions, the suffering has been acute.
Buy-and-hold shareholders should be encouraged by some research carried out by the Bank of England. Andrew Haldane, a leading BoE man, believes the financial system has become increasingly impatient as modern developments – hedge funds and so on – have distorted markets. His calculations apparently show that $1 invested in 1967 by a long-term investor would today be worth $2,650, whereas an activist trader would have obtained $75. So buy-and-hold would have dramatically outperformed bought-and-sold, although a cut-off point when the stock market is deeply in the doldrums could distort such a comparison.
Short-termism is not new, but it has never been as powerful as it is in these hectic days of globalisation. It is difficult to imagine the world ever returning to more laid-back times when the stock market was a more casual place but also nurtured some nasty habits. For example, in my early days, insider trading was not an offence; it was regarded by the great and the good as an acceptable practice. I recall one government minister talking about those "little games played in the City".
Although activist investing is attracting a growing following, I remain convinced of the merits of buy-and-hold, particularly for the small investor who regards the stock market as a sideline and probably does not have the time – or the facilities – to try to follow every twist and turn. But a flexible approach is essential. Sometimes, an early sale, if the picture changes, is advisable, but there is often a case for displaying a little patience.
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