Secrets Of Success: I'll play it safe at this end of the bull
Saturday 18 March 2006
As the FTSE 100 Index broke through the 6,000 mark for the first time in five years yesterday, I was struck by this week's thoughtful words this week from the experienced technical analyst David Fuller. He is currently facing a difficulty that faces all experienced investment professionals when markets start behaving the way that they are at the moment.
All the surface evidence suggests we are seeing a typical late bull market flourish, with prices of all sorts of strongly-performing financial instruments still moving sharply upward, seemingly without regard for considerations of value.
Those with long memories know that these times, when market momentum parts company with valuation constraints, are always the most difficult conditions for those who genuinely hold their clients's welfare dear to their hearts (which rules out a big chunk of the retail financial services business admittedly, but that is another story).
The problem is that "experts" rarely get thanked for giving an early warning about the imminent end of a market phase (and certainly not in the final stages of the financial year, when fund and broking sales teams are in full cry).
Because price advances tend to accelerate ahead of a final market peak, many investors find themselves becoming newly enthused as markets power ahead, even though hindsight suggests they should be cautious. It is natural enough to think that those advocating caution at this point are losing the plot, or at least their bottle.
It is easy to forget how scornfully Internet nuts dismissed those who were predicting the end of the bubble in 2000, on the grounds that they simply "didn't get" how new technology was rewriting the way the world worked.
In his book The Future for Investors, the Wharton professor Jeremy Siegel recalls how the dean of his business school received scores of letters and emails calling for him to be fired after he wrote an article in The Wall Street Journal in 1999 saying Internet stocks could not possibly be worth the price at whichthe market was valuing them.
One of the politer letters read: "Not only is this guy a dinosaur, but he knows absolutely nothing about Y2K and forward business models... I hope that he may soon retire from dear old Wharton... or to the funny farm - whichever comes first. He is nuts, period, and should have a muzzle."
What prompted Fuller's concern was a suggestion from the economics consultancy GaveKal that we may now be entering a dangerous period when central banks are clearly trying to clamp down on overblown asset markets through a co-ordinated round of global interest rate rises.
The central banks are, says GaveKal, withdrawing liquidity from the markets, but at a time when commercial banks are still lending without much restraint. In other words, credit is still growing, while money is being restricted.
"If this scenario is indeed the one we face today, and I believe it is," says Fuller, "then we are entering a period of increasing risk relative to what we have become accustomed to over the previous three years. But there is a danger in issuing warnings, effectively crying wolf, because in terms of crowd sentiment the psychological Rubicon from bull to bear has yet to be crossed.
"Therefore, people who are feeling increasingly nervous and cutting back on exposure, me for instance, see an opportunity cost because old reliables over the past three years, such as gold and silver and leading stock markets, are still rebounding following short-term reactions. Frustration over opportunities missed can tempt one to dismiss risk perceptions to make up for lost time.
"I've certainly done that before. Remember, the most overleveraged and complacent fool will look like a genius, until the day markets turn down and keep falling for a few months.
"Will that happen? Honestly, I don't know, and neither does anyone else. But I've seen enough, not least in terms of what are now synchronised monetary policies by the Fed, ECB and BoJ. I can also see some overextended trends, some of which show a loss of momentum.
"I fear that markets are waltzing into a cul-de-sac. If so, we could see a cascade effect, in which markets look as if they have suddenly gone over a waterfall. But remember, I'm only looking for a medium-term correction, with the most likely danger period being 2Q and 3Q 2006."
Apart from the fact that this is close to my own view (always a worrying sign), this seems to me to sum up the situation very well. Other professionals I respect, such as Derek Stuart, the manager of the Artemis Special Situations fund, take a similar view,
The other telling point that was made in the GaveKal analysis is that investors seem to have convinced themselves now that central banks have lost the power to restrain markets, just as in 2002 it was hard to find anyone who thought central banking policy could pull the markets out of their then tailspin.
In the event, the cheap money policy the Federal Reserve has pursued since mid 2003 has worked like a dream. It is true that nobody knows how far the Fed and its new chairman Ben Bernanke will eventually want to go in raising interest rates now that rates are back up to a more normal level (4.5 per cent), but the risk is that more is needed.
Despite the well-publicised dangers of market timing, my view is that smart investors should not be afraid to be too early in conditions such as the one we are in now. The risk of egg on face is ever-present in this business. A number of holdings in my equity portfolio are up by 15 per cent or more already this year. While I normally keep it fully invested, it looks to me prudent on risk grounds to bank at least some of those gains now, knowing full well that such a move could look pretty stupid in six weeks time, if things go higher still.
One thing I left out from my piece about Warren Buffett last week was an elegant passage in his latest Letter to Shareholders in which he highlights the way that intermediaries - fund managers, brokers, hedge funds, financial advisers, consultants and so on (a group he ironically refers to as the Helper family) - are taking an increasing proportion of the aggregate returns that the stock market produces.
This is the concluding sentence: "The burden of paying Helpers may cause... equity investors, overall, to earn only 80 per cent or so of what they would earn if they just sat still and listened to no one". I fear there is more an ounce of truth in this.
Government's Pension Wise guidance service is up and running
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Mark Dampier: What price equities when cost cutting does nothing for profits?
Questions of Cash: Why was my case ignored by My Civil Service Pension?
Offset your mortgage and save thousands
- 1 The West has it totally wrong on Lee Kuan Yew
- 2 Watch: Man takes selfie every mile of 2,600 mile hike, creates amazing timelapse video
- 3 The day I starred in Only Fools and Horses
- 4 #FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
- 5 Scientists have discovered a simple way to cook rice that dramatically cuts the calories
Nigel Farage brands LGBT activists 'filth' and 'scum' and accuses them of scaring away his children after they invade his local pub
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Russia threatens Denmark with nuclear weapons if it tries to join Nato defence shield
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Revealed: Putin's army of pro-Kremlin bloggers
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...
Day In a Page
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station