'Nothing is an all-the-time good investment. Certainly not cash'

'Nothing is an all-the-time good investment. Certainly not cash'
People have been going back to risk and leaving the bomb shelters.

By James Bartholomew
Last Updated: 7:10AM BST 23 Apr 2009

I have to admit that I find the extreme ups and downs in the markets in recent months rather exciting. I am sorry that fortunes have been lost and people have suffered. I myself have lost a considerable amount.

But this has been exciting in a similar way, I imagine, as the view of London burning in the blitz was once thrilling for my mother when she recklessly went to the roof of Broadcasting House, where she was working, to have a look.

It is a jolly sight more fun, to be sure, when things are going well and they have certainly been a lot better since the rally started early last month.

I have had an extraordinary time with my shares in the pub-owning company, Enterprise Inns. Some readers may remember that 11 weeks ago, I wrote here, "I don't normally manage to lose money quite so quickly…"

I had bought shares in Enterprise at 69.75p. By the end of the week, they had halved. They reached a low of 32p.

Then they stabilised and eventually rose somewhat. But at the beginning of the week before last, I was still nursing a loss. Then, suddenly, whoosh! Up they went, leaping upward like a drug-enhanced mountain goat. A 15pc rise, then another 20pc. Out of the blue, I found myself in profit and still climbing.

The shares zoomed up to over 100p. They then fell back hard but got another lease of life. Having failed to buy more when they had been 32p, I found the courage to buy again when they were 93.5p.

There is human nature for you. As to whether this further purchase was wise, you can find out if you go to the business section of the main paper and look at the stock market prices under Travel and Leisure. They were trading at 117p on Monday.

The amazing downs and ups of Enterprise Inns reflect the abrupt return, since early March, of the appetite for risk. My defensive shares, such as Telecom Plus, a utility provider, have been shunned.

But shares that were heavily sold down because the companies are cyclical or heavily indebted, revived strongly. I also have shares in Tolent, a building company. It has performed like an investment Lazarus, leaving death's door at high speed.

Meanwhile, my investment in yen, through bonds, has done badly in the last couple of months. The yen has weakened precisely for the same reason as Enterprise Inns strengthened.

People have been going back to risk and leaving the bomb shelters. I have lightened my holdings in the yen, at least for the time being. This is because my view of what is going to happen in the economy and to investments has shifted a bit.

My rough idea, currently, of how things will pan out is this:

• first, the "quantitative easing" will work in ending the economic decline. The stock market will respond positively and go higher.
• Second, after a lag, inflation will pick up strongly. This will cause a flight to gold and inflation index-linked government stocks (and perhaps the yen).
• Third, in response to the inflation, interest rates will rise which will hurt shares somewhat – though it is difficult to tell how much.
• And finally, when inflation seems to be coming down and interest rates fall back again, there will be big rises in shares and property.

This forecast could easily be partly or completely wrong. But even if this guess/forecast of the future is right, the timing is uncertain. How long will the lag be before inflation? How much will people anticipate it and buy gold beforehand? It is hard to predict.

I have already bought some gold in the form of units in an exchange traded fund, ETFS Physical Gold and I have bought some Treasury 2.5pc 2024 inflation index-linked stock. But, at the time of writing, they have done nothing.

Yes, there is a risk of hyper-inflation, but a rush for inflation-protection investments may not really get going until the danger is clear and present. In the meantime, I suspect that shares are the investments that may do best.

That is why I bought extra shares in Enterprise Inns. I have also increased my holding in Home Products, a Thai company that runs DIY stores.

Its latest results were surprisingly good and the shares have risen by a third in the last two months but even at the price I paid, 4.59 baht, the shares have a historic dividend yield of 7.5pc.

I had better add that, of course, I could be completely wrong. Many people think this is a bear market rally. We each must make our own judgements and arrange our investments accordingly.

But in these financially dangerous times, I believe that anyone with savings should be thinking hard about it. Nothing is an all-the-time good investment. Certainly not cash.

http://www.telegraph.co.uk/finance/personalfinance/investing/5202598/Nothing-is-an-all-the-time-good-investment.-Certainly-not-cash.html