Read up on history to read the stock market

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There are a number of well-known reasons to be worried about the future direction of the UK stock market:

The recent 1 4 percentage point rise in US interest rates - the first hike in five years.

The incredible 71 2 per cent annualised growth rate in American GDP (based on the last quarter's figures). This rapid industrial expansion will need financing and also carries with it the risk of increasing inflation.

The substantial expansion in the German money supply.

High worldwide stock market ratings and expectations.

The decrease in UK personal spending likely to result from the tax increases. - The persistent UK trade deficit that is very substantial at this stage in the cycle.

The growing number of new issues.

There might well be another cut in interest rates very soon, but there cannot be much further to go before they bottom out. Meanwhile, it may help readers of this column who did not experience the Sixties and the 1974 crash to read George Blakey's book, The Post-War History of the London Stock Market 1945-92. The title is a bit misleading as the history is very patchy from 1945 to 1965, but from then on he devotes a chapter to each year.

The highlights and important news items of companies like Hanson, Slater Walker, BTR, Polly Peck, Racal, Tomkins and Cavenham are followed from infancy through to the present day, or to the moment they faded from the scene.

It is interesting to see year by year how the great growth stocks of today appeared to investors then. For example, in 1973 Sainsbury's offer for sale of 27 per cent of its equity at 145p a share gave the company an overall market valuation of pounds 117m.

There was no forecast and the p/e ratio based on the 1972/3 figures was a lofty 20.6 against 17 for Tesco. But housewives knew a thing or two so the issue was 14.5 times over-subscribed and the shares opened with a 17p premium. Anyone who acquired the minimum subscription of 100 shares for pounds 145 would have a holding today worth pounds 5,000.


In 1974, although BTR's share price was depressed by the raging bear market, pre-tax profits for 1973/4 were up by 38 per cent to pounds 6m, and the target for the following year was pounds 10m pre-tax; the p/e ratio was only 3.7 with a dividend yield of 9.1 per cent. Although there are bound to be many future bear markets, you may never see such a bargain again.

At the bottom of the bear market on 6 January 1975, the FT-30 share index was selling on an average p/e ratio of 3.8 with a dividend yield of 13.4 per cent; ICI also yielded 13.4 per cent, Glynwed 24 per cent and Tarmac 17.7 per cent. As Mr Blakey says: 'There was no doubt that the market was discounting every possible disaster.' Easy to see now, but at the time fear had the upper hand.

Mr Blakey's comments on shells in 1987, after the crash, are also pertinent today: 'Among the principal casualties of the crash were the 'shells', tiny quoted companies with a vestigial business, control of which had been bought by one or more entrepreneurs. Suspended pending reorganisation and refinancing, they would then return to the market after tranches of the increased capital had been placed with friends of the new management and favoured institutions. The first day of dealing would see a mad scramble for stock by small private investors, alerted to the situation by the City pages and by the specialist 'penny share' publications, resulting in a meteoric rise in the share price.'

And on other similar speculative counters, he says: 'The October crash was a watershed for these speculative favourites as investors clamoured to sell in an unwilling market where the size had contracted and the spread had widened alarmingly.'


If a bear market develops today, shells will certainly be among the main casualties.

The important point for active private investors is that a bell does not ring at the bottom of a bear market or the top of a bull market. In both cases there are tell-tale signs for an experienced investor that a familiar pattern is developing. Mr Blakey's book gives the backcloth and the highlights of each year in the market from the mid-Sixties onwards. Inexperienced investors will obtain a basis for comparison and experienced investors will have their memories refreshed. There is also another reason to read this book. Great growth companies can sometimes emerge after being almost unnoticed for many years. BTR is a good example. I remember in the Sixties and Seventies being surprised each year by its strong and steady growth. Every year, the company churned out increased earnings per share in spite of the vagaries of the stock market; it became a giant while many of its rivals slept.

There is no way of knowing for sure if a small growth company you select is going to make it all the way. However, Mr Blakey's book will give you the highlights of the history of other growth companies - as well as those that fell by the wayside. You will obtain a better insight into the characteristics to look for and to avoid.

I recommend this book as an enjoyable, light and instructive read that captures the spirit of the times. It is published by Mercury Business Books at pounds 19.95.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well up. He has agreed not to deal in a share within six weeks before and after any mention in this column.