Get two things right: Make the money and Keep its real value

Diary of a private investor: 'The bears have taken the wrong course'
Right now, the same pundits who were wrong six months ago are continuing to offer bearish opinions.

By James Bartholemew
Published: 9:09AM BST 21 Oct 2009

THERE are, I suppose, some people who have never heard of Tom Watson, rather like there are those who have never heard of President Kennedy or Marilyn Monroe.

For those to whom the name means nothing, let me give a brief introduction. He is one of the greatest golfers ever to have walked onto a tee.

He won the Open five times and three other majors. Even more remarkable, this year he came back to Britain at the age of 59, when virtually no golfer is competitive at the highest level, and nearly won the Open again.

He had the equal lowest score and was only beaten in a play-off. What technique!

Deeply impressed by that last thought, I bought one of his old books – published in 1992 – to try to improve my unreliable swing.

The dust-jacket proclaimed, obviously with the expectation that readers would be dazzled, that his career winnings had amounted to over $5million (about £3million).

What struck me about this sum – given his huge success – was how relatively small it was. Admittedly prize money and sponsorship deals have increased. But the value of what was considered a fortune at the time has been destroyed by inflation.

What did he do with his winnings? Did he invest them in shares and property or did he put them in a deposit account at a bank? I don't know, but if he did the latter, the real value has been squished (as my daughter would say). If he invested it, he will have remained a very wealthy man.

He had a key decision in his life. Having achieved fabulous success in the Seventies and Eighties, would he let the fruits fade as he got older?

Being American – share investment is much more normal there – he probably did the right thing. But I have met several intelligent, well-educated people in recent years who seem to have no idea what is at stake.

You can have a wonderfully successful career or a hugely profitable divorce, but the value can be whittled away. You have to get two things right; not just one. You have to make the money and then keep its real value; that is, its purchasing power.

You may say that inflation is yesterday's story. True, it is a fraction of what it used to be. But you need remarkable trust in British governments to be completely confident that it won't come back.

And even if inflation were to stay at a mere 2.5pc a year, the value of your cash would halve over 28 years. Cash is not safe. Inflation means it is a slow crushing of your wealth.

All of which brings me to one of the most remarkable things about this astonishing year in investment.

The massive rise in the stock market and the abrupt recovery in the housing market in certain areas of Britain – particularly London – have been achieved in the face of almost total opposition from pundits in newspapers and financial circles.

Your Money has been a notable exception to that consensus view, but I don't think I have lived through a bull market which took place in the face of such an overwhelming opinion that it would not happen.

Even back in the dark days of 1974, opinion moved in favour of a bull market so fast that I remember that call options – a way of betting on a market rise – became phenomenally expensive.

Right now, the same pundits who were wrong six months ago are continuing to offer bearish opinions.

There are a few who occasionally mention something along the lines of "the short term market strength has been surprising but the fundamental problems remain the same and could lead to major downturn anytime soon".

But most of them seem unabashed. They do not apologise for getting it wrong. It is almost as though some of them live in a parallel world where they remain, in some magical sense, right despite the fact that the market has not – for the time being – done as instructed.

They turn a blind eye to the fact that thousands of people are influenced by them and have, as a consequence, missed out on a major bull run.

There is one financial newspaper – which I worked for years ago – which I cannot remember recommending buying shares at any time over the past 35 years.

My guess is that it has always thought it would look knowing and sophisticated by casting doubt on their prospects. But this has not been clever at all. It has put false sophistication above good advice.


http://www.telegraph.co.uk/finance/personalfinance/investing/6394158/Diary-of-a-private-investor-The-bears-have-taken-the-wrong-course.html