A Beginner's Guide To Investing In Shares: If you want a good bet then listen to the boss

Big firm or small firm, there are few sure-fire winners, writes Magnus Grimond
Click to follow
The Independent Online
Given the stock market's recent problems, it is easy to ascribe the same characteristics to all shares. The truth, particularly in less grim times, is different: there is any sort of share to suit just about any temperament. There are shares for those who like the idea, but don't like the bother and just want a few "bankable" bets to tuck away and forget. Then there are more speculative stocks for those prepared to accept, even in more normal circumstances, the serious possibility of losing money, even over the long term. And there are any number of variations.

A useful starting point to find shares that match your mood is the size of companies. The UK's biggest 100 companies, collected together in the FT-SE 100 index, represent around three-quarters of the whole stock market. These are the bluest of the blue chips, so called after the most valued counter on the poker table. Not surprisingly, perhaps, they include many household names, like Barclays, British Airways and Tesco. As the biggest they are broadly the safest, if not always the best, shares to hold. They can go bust like any other company and occasionally they do. British & Commonwealth, a weighty name from Britain's shipping past, sank beneath the waves in 1990 after being caught up in the financial excesses of the 1980s. More famously, Maxwell Communications, once the plaything of Robert Maxwell, followed its namesake to the grave in 1992.

Such disasters are rare, but "Footsie" stocks can still be disappointing performers even at the best of times.

Rolls-Royce and the Peninsular and Oriental Steam Navigation Company (P&O) are two illustrious names from Britain's industrial and commercial past whose shares have struggled to keep up with their peers. But they have had quite a hard act to follow.

The value of the Footsie index has almost quintupled (multiplied by five) since1984. So even if you had stuck to an average portfolio of "boring", "safe" blue chips, you would not have at all done badly over the past 13 years.

Even so, many people crave excitement and find it among the so-called second-liners. These are shares that the big City institutions ignore because they cannot buy and sell them in the sort of quantities that would make any difference to their vast portfolios. This leaves the way open for private investors to steal a march on their bigger brethren. People astute enough to see that privatisation would provide rich pickings for the likes of Stagecoach, which has scooped up a large part of Britain's bus industry, would have done well. Floated at 112p a share in 1993, the shares are well over 700p now. Likewise Airtours, now the UK's second- biggest travel group, has made the most of the consolidation of the travel industry into fewer hands. Available for as little as 268p in early 1993, the shares are now priced at more than pounds 12 .

Of course, the risks of smaller companies going bust or not performing are higher. It takes relatively little to knock them off course. But whatever the risks and the evidence, many investors still continue to swear that a "good little 'un is worth several big 'uns".

One logical conclusion of this philosophy is that you should pick them as young as possible. But new issues, where companies come to market for the first time, can prove more akin to gambling than investment. It is not always safe to rely either on the credentials of the City institutions behind the flotation or the apparent prospects for the product or service the fledgling company is offering.

Two notorious recent examples are Aerostructures Hamble and Pace Micro Technology. The Aerostructures float in July 1994 was backed by NM Rothschild, the blue-blooded merchant bank, while Lord King, wreathed in laurels from turning round British Airways, sat as the company's chairman. Yet less than 18 months later and with a string of disasters behind it, Aerostructures had been forced to accept a bid at 32p a share, some 88p below what the unfortunate investors had paid less than 18 months before.

A tell-tale sign was directors cashing in their shares at the time of the flotation. With Pace, the warning lights flashed red after the founders raised a mighty pounds 150m from their flotation two years after Aerostructures.

The story seemed brilliant. A maker of the decoder boxes required for the new age of digital television, Pace was seen as being on the cusp of cashing in on the next big consumer craze. But after three profits warnings in six months and a management shake-out, the shares now languish at less than a third of their 176p launch price. A classic bubble stock that burst.

The moral of this tale is that picking winners is never easy, although one thread that tends to run through good investments is good management.

Good managers can turn a boring business into a cracking investment, but bad managers running a whizzy business never can.

So go for blue chips if you want to be safe(r), but always go for the best people whatever type of company you invest in.