In the short run, he says, trends in share prices are determined by monetary factors, and the so-called fundamentals (profits, earnings and dividends) are irrelevant. Worse still, these trends are exacerbated by crowd psychology, leading to violent but hard-to-predict swings in prices and a tendency among investors, professional and private, to buy and sell at the worst possible moment.
If that sounds depressing, the bad news is that in the 1990s this volatility is becoming much worse, thanks to the movement of huge sums of money between financial centres around the globe.
Henry Kaufman, a bond expert like Professor Pepper and known as Dr Doom, on account of his uncheery views, says the build-up of vast sums in lightly regulated non-bank hands, such as unit trusts and mutual funds, allied to huge switching between different world centres, will make spectacular crashes a regular feature of stock markets.
If these views are correct, why bother with the stock market? One reason, as even Professor Pepper agrees, is that it is not a complete madhouse. Over three to five years, share prices are determined by company fundamentals. Indeed, he warns that it is risky for long- term investors to base investment strategies on trying to predict what the stock market will do over a year. Instead, he says, they should accept that in any year their performance may be badly affected by monetary and crowd psychology factors.
One conclusion I draw is that risk-averse private investors should copy the regular investment strategies forced on big institutional investors by cash inflows. Invest a regular sum every month, and the violent fluctuations in the stock market can become a positive asset by adding stock at temporarily depressed prices.
Such a strategy makes it easier to deal with a hugely profitable stock market such as Hong Kong, which performs wonderfully long-term but seems like a terrifying roller- coaster ride in the short run.
There are endless variants on this theme. Take the man who inherits pounds 100,000 and wants a decent return, but fears that stock markets will nosedive the day after he piles in. He could leave the money in the building society but invest all the income in shares as it accrues. If he was doing this in a well-chosen UK smaller companies fund he could pursue an aggressive investment strategy (PEP-protected) with no risk of loss of nominal capital. At current interest rates it might seem slow to start with, but soon this would turn into an attractive each-way bet. If interest rates fell, the shares acquired would rise in value. If interest rates rose, he would have more to invest and share prices would be lower. In the medium to long term he should do very well.
The moral for lump sum investors is that they must take a long-term view. If they can do this the odds are that they will do at least as well as with a regular investment strategy because of the tendency for shares to rise strongly in the long term.
Hong Kong shares have risen more than 120-fold in sterling terms since 1969, even after the latest mini-crash. Given its pivotal relationship with China, the South-east Asian economy and the rest of the world, there must be an excellent chance that this turbo-charged long- term performance will continue. My favourite individual Hong Kong share is China Light & Power, a power utility that is expanding in mainland China. Some observers are suggesting that any share with China in the name should be avoided, and the price, quoted under electricity in the FT-SE 100 index, has tumbled from an overhyped 495p to 343p. But since they were floated in 1973, the shares have outperformed the Hong Kong index by two and a half times.
The same ultra-long-term approach can be applied to the UK, by choosing shares that grind higher over the years. There is a possible bonus, too, in that investors taking this seemingly boring long-term view frequently do well in the short term as well. I have picked 10 shares that rarely produce short-term fireworks but have done superbly long-term.
The 10 are Halma at 230p, a specialist in small acquisitions, the thinly traded regional beer group, Joseph Holt, at pounds 31.75, the media group, Daily Mail & General Trust, at 1,210p, the global support services business, Rentokil, at 239p, the colour supplements, magazines and brochures printer, Watmoughs, at 458p, the fabric printing specialist, Leeds Group, at 310p, residential property collector, Bradford Property Trust, at 252p, the electronics distributor, Farnell, at 575p, the life insurance group, Britannic Assurance, at 437p and the fund management giant, M&G Group, at 908p.
Most of these shares are well down on their year's highs and could easily go lower on a one-year view. But in three to five years they should do exceptionally well for both dividends and capital growth.
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