We don't want a little, know-all leprechaun
THE LATEST NEWS FROM THE MOTLEY FOOL
Sunday 28 February 1999
Apart from being impossible, it wouldn't half make investing boring. Rather than make for efficient markets, the exact opposite would happen. It is impossible to time the market. Buying at the bottom and selling at the top is something we can all do once or twice, but no -one can consistently achieve that feat. There is almost as much chance of winning the lottery.
Timing the purchase and sale of shares in individual companies is just as difficult. Take a look at Admiral, the very successful IT services group. On Tuesday, it reported another set of impressive annual results, with earnings per share (EPS) rising by 43 per cent. Despite that, the shares fell from 1428p to 1290p, or 9 per cent on the day, and followed that up by posting another triple-digit fall the following day. The market didn't like the fact that the company failed to beat broker expectations and it also feared that the rate of growth the company has achieved in the past was unsustainable.
The words from Clay Brendish, the executive chairman, that "1999 will be an interesting year" may have done the damage to the share price. If shareholders had heard the leprechaun's bell toll on Monday evening, they would not be nursing a 16 per cent, two-day fall in the value of their investments.
On Wednesday, the FT-SE 100 charged through its previous closing high, reached in July last year. For how many years have experts and novices alike been saying that the markets are at a peak, especially the US Dow Jones? Those people should never invest in the market, because they don't understand the value of time and compounding returns.
Sure, history says that a price earnings ratio in the high 20s is unheard of, but then the stock market has been breaking records ever since it was invented. If you said to people in the early 1990s that the FT-SE 100 would pass through 6000 before the millennium, they would have had you certified. Likewise, if I said that the index would fly through 20000 in 2011, you would think I was mad. But to achieve this "only" requires compounding returns of 11 per cent per annum.
We Fools don't profess to know which direction the market is headed, in the short term. There could be a financial crisis brewing in any part of the world right now that will send the markets into a tailspin. Alan Greenspan, chairman of the US Federal Reserve, has hinted that the next move in domestic interest rates could be upwards. As interest rates rise, disposable income falls - and equities suddenly do not look as attractive as other forms of investments. This sort of scenario triggered the share market crash of 1987.
One thing Fools do know is that, over the very long term, equity markets rise. They have easily seen off 1987, so much so that it hardly registers a blip in share market graphs. At the time analysts were pronouncing the death of equities.
There is no doubting that, based on history, world markets currently look high. If you are worried about "the crash" - and you've probably been worried about that since you began investing - then simply extend your investment time-frame. Time is the friend of the patient investor.
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