Some events of this week highlight this fact. Last weekend, Vodafone won control of the battle for AirTouch, bidding pounds 37bn for its US counterpart. This is almost pounds 10bn more than the only other offer thought to have been tabled. If I said that for pounds 10bn you could buy a Cadbury Schweppes, Boots or J Sainsbury, that gives you an idea of the premium that Vodafone was prepared to pay.
The market's response was one of utter euphoria. On Monday morning the shares immediately jumped higher, finishing the day up 157p at 1225p, almost 15 per cent up. At that level, in the 11 trading days since the beginning of 1999, Vodafone shares had appreciated by a stunning 25 per cent, adding to the 122 per cent rise in 1998.
Contrast that with the reaction to British Aerospace's merger with its fellow British company, Marconi, for pounds 7bn. The market took fright at this, fearful that BAe had overpaid, and on Tuesday the shares nosedived 68p to 425p, or almost 14 per cent.
Both Vodafone and BAe have been successful in creating significant shareholder wealth over the past five years. Since almost going bust in the early 1990s, BAe's management has turned around the company to such an extent that, when the Marconi acquisition is complete, it will be the third largest defence company in the world, behind US giants Boeing and Lockheed Martin.
Vodafone is simply one of the great British success stories. Who would have thought that this little company, spun out from the disappointing Racal Electronics, would soon be the biggest mobile telecommunications company in the world, and be capitalised at a greater value than BT? Successful long term-stock market investing is all about identifying these companies, and sticking with them for the long haul.
The other big market event of this week has been the emergence of internet mania among UK shares. In last week's column we highlighted Dixons as a company with a useful sideline business: Freeserve, its fast growing Internet Service Provider (ISP). Little did we know that just about any company connected with the internet was about to be bid into the stratosphere. The most startling rise was that of On-Line. The company develops interactive internet games that users pay a flat fee to play for a few weeks. At the beginning of this year this company was the second-smallest quoted company on the UK markets. By Wednesday, the shares had appreciated by almost 2100 per cent, from 12.5p to 273.5p in just 11 trading days. However, it is very difficult to evaluate its business plan and products because information is scarce.
This is not the first time a speculative bubble has formed around an individual company. Oil tiddlers are an old favourite, and just last year Desire Petroleum shares were bid from 18p all the way up to 445p on hopes of an oil strike in the Falkland Island region. A few months later, the shares again languish at 19p.
The Fool's philosophy is to buy what you know and understand. Any other investment, in companies like On-Line and Desire Petroleum, is pure gambling. If that's how you view the stock market, you'd be better off spending time down the local betting shop.
my dimmest investment
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As an amateur investor I read a weekly investment magazine. On 2 May, 1997 it recommended a share at 89p. On 8 August it reported that despite a profits warning it remained a buyer at 60p. I bought a small number. On 27 March 1998 a receiver was appointed. I accept the risks of buying into small companies but was disappointed that the magazine never reported the appointment of a receiver or owned up to its misjudgement.
Fool responds - You accepted the risk and sadly lost all your money. Magazines and tip sheets never take responsibility for recommendations. You are the person best placed to look after your own financial affairs and that means researching and knowing a company before parting with any of your hard-earned cash.Reuse content