You can win if you wait
Stocks reward the steely nerved, vigilant and committed. Hang on for the ride, says Magnus Grimond
Sunday 22 March 1998
The first is that stocks and shares remain one of the best ways to enhance your savings. In the six months this column has run, the stock market, as measured by the FT-SE All Share index, has risen by over 9 per cent. Had you popped that pounds 5,000 inheritance from Auntie Madge into a fund that mirrors the market, like Virgin Direct's UK Index Tracking unit trust, back in October you would now be pounds 490 richer, before charges.
The safety-first approach of stuffing the cash in a bank or building society account would have left you with a little over pounds 180 in interest. Even in these economically prudent times, inflation would have eaten up around half of that modest sum.
Of course, the stock market has had its ups and downs since we began. October itself probably gave investors the biggest rollercoaster ride since that infamous October of 1987 and its Black Monday meltdown. Madge's pounds 5,000 invested on 6 October in that nice Mr Branson's Virgin tracker fund would have been looking a rather deflated pounds 4,627 by the end of the month - a heart-stopping pounds 373 loss in 29 days. If you had been desperate for cash in early November you would probably have been put off equity investment for life.
Which brings us to lesson two. The stock market rewards the patient, the committed and the steely-nerved. There are ways to get rich quick through shares and their racier derivatives, but don't think you can just invest and forget. Penny shares, warrants, options and the like require a semi-professional approach and constant vigilance. They are not for the faint hearted.
The rest of us - prepared to put some effort into picking shares, but not to spend every waking hour worrying about it - need to do some soul- searching. How much can we afford to lose? The resulting figure should represent our pot for speculation.
Then ask: "How big a gambler am I really?" If you are still uncertain, safe blue chips like Marks & Spencer or Barclays may be the biggest risk you should take. Better still, test the water with a collective fund like an investment or unit trust which spreads the risk for a modest investment.
More adventurous types will quickly become bored with this. If you want rocket-propelled excitement, growth shares are probably your bag. Technology stocks like Misys, Admiral and Eidos would have given you a run for your money in the past year, having comfortably doubled in that time.
But remember the wealth warning from the regulator clearly displayed on every investment wrapper: "Past performance is not necessarily a guide to the future." Shares that shoot up one minute, or even for years, can crash down again in short order. No investor should forget "comet stocks" like Poseidon, Polly Peck and Bre-X. An investment, to be a good one, must have a credible story, credible management and credible financial backing.
Remember also that the stock market is as much prone to fashion as anything else. A punter who had been asleep for the past 10 years would not recognise the scene today. Hanson, once king of the conglomerates, is now reduced to quarrying stones. BTR is stumbling along with the walking wounded, while clearing banks like Barclays enjoy star status.
Of course, the attractions of many businesses have changed in the 1990s. But the transformation in financial services is not enough to explain why banks had single-digit price-earnings ratios in the 1980s and are now honoured with values in the high teens or low twenties.
Fundamentals do matter, of course. High-yielding shares are an excellent example: a yield much above the market average, currently 2.9 per cent, should trigger alarm bells about the company or its prospects.
Even so, high yields (meaning a low share price) are often an over-reaction by the market to bad news. Very often the shares bounce back: - indeed the FT-SE 350 High Yield Index was the best-performing major index last year, producing growth of nearly 26 per cent.
This is where those steely nerves come in. A buyer of T&N, the former asbestos group, for instance, when its shares were yielding a chunky 6 per cent plus last summer, would have since doubled his money. It helped, of course, that an outside bidder saw value where the stock market feared to tread.
So should the bravehearts continue to pile into the market, or is discretion the better part of valour? The gloomsters say the rise in gross domestic product could crash from 3.5 to 4 per cent last year to as little as 2 per cent this: hard to reconcile with average p/e ratios in the 20s and yields below 3 per cent for only the third time in 25 years. The last time shares gave so little income was ahead of the 1974 and 1987 crashes. You have been warned.
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