Wednesday, 17 June 2009

Diary of a private investor: Three reasons why it is bigger risk to be out of the market

Diary of a private investor: Three reasons why it is bigger risk to be out of the market

Can the spring rally continue into summer? The FTSE 100 was crushed at a mere 3,512 on March 3. By early this week, it had risen to 4,500 – a 28pc jump.

By James Bartholomew
Published: 7:00AM BST 03 Jun 2009

In glorious Technicolor retrospect, it seems pretty obvious that the market was likely to recover from its March low since many individual shares at the time were at Armageddon-fearing valuations.

Indeed, I did mention in this diary in early March that a company called Staffline was priced at a “mere” 2.5 times its prospective earnings and the shares were “seriously cheap”.

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These shares have risen 66pc since. And that illustrates the problem. Many such shares may well still be excellent value for the medium or longer term. But you would not use the phrase “seriously cheap” so freely now.

So what happens next? If that was a rally from extreme cheapness, what does the market do when it is merely excellent value? Last week I got a little nervous and sold some of my shares in Enterprise Inns, a pub company.

I reckoned May was ending and summer is the season when shares tend to do badly. Add in that the market has had such a terrific run and was there not a setback risk? Was it not a good idea to have more cash in hand?

But three things now make me think the bigger risk is being out of this market. The first is a paper by economist Tim Congdon, who has just created a new consultancy International Monetary Research.

In this he argues inflation will not take off in the next two years, contrary to my previous belief. I had thought all this monetary stimulus was likely to lead to serious inflation. If this happened, it would lead to higher interest rates, which would undermine any potential bull market.

But, looking at the American economy, Congdon examines major economic setbacks and finds in six cases out of seven since the Second World War, the inflation rate two years after a trough was lower that it had been previously. That is one worry of mine calmed.

The second influence again comes from Congdon. He went on to study how the stock market in America performed in the two years following a trough in economic activity. Of course, this is not America, but a similar story can probably be told here. In every case, shares rose.

And the third influence is the Coppock Indicator, devised by a man of that name many years ago. He asked bishops how long it takes people to recover emotionally from the loss of a loved one. He was told 11 to 14 months, and from that he built a system – presumably thinking it could take investors a similar time to get over losing their savings.

I believe his system has an excellent track record for confirming the start of bull markets. Well, the Coppock Indicator for the FTSE 250 has given a buy signal and apparently it is now inevitable it will do the same for the FTSE 100.

Given a new lease of confidence, this week I more than bought back the Enterprise Inns I had sold last week (sadly at a higher price). Before that I bought more shares in Telecom Plus, a utility provider at 291p.

I also bought more shares in Nippon Parking in Japan at Y4017 and Y4984; Home Products in Thailand at Thai baht 4.63 and 5.23, and Bumrungrad Hospital at Thai Baht 27.33. Most have attractive dividend yields.

I have also bought two chunks of shares in Cheung Kong, the Hong Kong property blue chip at HK$91.70 and HK$99.65.

I have financed the purchases by selling most of my yen. I have also sold my inflation-indexed gilts and most of my corporate bonds. Why so many Far Eastern shares? Because the proportion in my portfolio had become tiny and the bull markets there seem to be charging ahead.

I also fear that – despite the good medium prospect – Britain might have a lull over summer. I am still 20pc in cash and bonds. But if the market does weaken between now and November, at that point I intend to get 100pc invested.

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