No Pain, No Gain: Is my 5,000 Footise forecast just too cautious?

Evidence is growing that shares are in the mood to enjoy a high-spirited run. For much of this year, we have witnessed a stock market of two halves.

Evidence is growing that shares are in the mood to enjoy a high-spirited run. For much of this year, we have witnessed a stock market of two halves. Blue chips have dillied and dallied and small-caps have continued to turn in rousing displays. Now top shares, despite the occasional hiccup, seem keen to join in the fun. And when the upper echelons start to throw their weight around, the investment world becomes a much happier place.

It could, of course, be argued that blue chips have been on the rise since the Footsie index slumped to 3,277.5 last March. But the recovery has often lacked conviction, although the index ended last year up 36 per cent from its traumatic low point. But, in the first six weeks of this year progress was non-existent. Now we know why.

Standard Life, the mutual insurer, has admitted unloading £7.5bn worth of shares. It had to sell to meet new solvency requirements. The insurance giant was among the few to remain faithful to equities during the three-year bear run, which more than halved stock market values. It is a pity Standard's dedication was not more handsomely rewarded. If it had been able to hang on a little longer, or spread its selling over a longer period, it would clearly have enjoyed richer pickings.

Still, Standard may embrace the stock market in another sense. The Edinburgh-based mutual, which has encountered a multitude of problems, is now contemplating becoming a listed company and giving up the protection of its mutual status.

Other insurance groups have also cut back on their equity investments because of the new rules. One estimate is that they have dumped at least a further £10bn worth of shares this year. They have dribbled out stock quietly and slowly, avoiding the publicity fund managers hate when they are dealing. Even Standard managed to keep the lid on its substantial sales while they were on. I would be surprised if the insurance industry's selling has finished. But if the stock market can hold its own while Standard (and others) are spraying around shares like confetti then it is clear other investors are recapturing their appetites for equities.

At the start of the year, I suggested Footsie would end 2004 above 5,000. I am not changing my stance. Forecasting is a hazardous occupation as I have discovered to my cost. Yet even with 10 months to go before judgement day I am wondering if I am being over-cautious.

Although Footsie attracts the headlines (and its progress engenders feelings of well-being) it is down among the small-caps where the real action is. There have been truly remarkable individual performances. But progress has been wide, reaching with the FTSE smallcap index up nearly 60 per cent in the past year. The no pain, no gain portfolio has always enjoyed investing on the undercard and its most rewarding shareholdings are tucked away among the smaller players.

It is much more risky playing with the little 'uns. Price movements are often uncomfortably volatile and it is easy, in effect, to get trapped in an investment. Information about companies is often inadequate and old-fashioned ramps can entice victims. Not many analysts can bother themselves with the undercard although, I suspect, their absence may not be much of a loss. For the brave, the rewards can be exceptional. By the same token, so can losses.

In the heady smallcap atmosphere, it is tempting to throw caution to the winds, particularly when dealing with exploration shares. With commodity prices strong, the miners and oilmen are enjoying spectacular gains. But do not forget, a great many exploration companies fizzle out, victims of hope and greed over reality.

To sell an exploration story is still relatively easy. After all, a hole can go everywhere and nowhere; produce everything and nothing. But danger lurks not just among the minnows; there have been heavyweight disasters as well.

Rewarding plays do exist. But the no pain, no gain portfolio is unlikely to invest in an exploration company. I like constituents to have rather more visibility and perceivable structures than blue-sky resource shares. I am not suggesting the exploration boom even approaches the dotcom madness, but there are frightening similarities.

I am still hunting for additions to the portfolio. I have yet to make my mind up about Urbium, the bars chain. But soaking up a few gins during my holiday in Lanzarote should help my deliberations.