Three important investment lessons

***Three important investment lessons ***The UK's housing cash machine stops paying out ***RECOMMENDED ARTICLES: How to value mining explorers... Why Blair is leaving a toxic legacy for Brown...

***Three important investment lessons

***The UK's housing cash machine stops paying out

***RECOMMENDED ARTICLES: How to value mining explorers... Why Blair is leaving a toxic legacy for Brown...

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Life is sweet for P&O shareholders just now.

There are plenty of bid stories out there at the moment, but P&O's takes some beating. Shares ended Friday up 5% at 547p as Dubai Ports World upped its offer for the group to 520p a share, trumping Singaporean rival PSA International. To have two ambitious governments, both flush with cash, locking horns over your company is pretty much a shareholder's dream come true.

But even if you missed out on the fun this time, you can still profit from the good fortune of others.

There's something to be learned from every deal. And we believe the P&O battle holds three very important lessons for investors...

The first lesson to be gleaned is do your own research (or 'DYOR' as the chatroom bulletin boards say) and TYOJ - trust your own judgement.

Back in October, just before P&O said it had received an approach, a full 11 out of the 13 analysts covering it had the company at "sell" or "hold". Shares traded at just 310.25p at the time.

The self-same analysts and commentators are now lining up to say what a unique and special asset P&O is, with its ready-made little empire of ports. So why didn't they tell us all this before the share price jumped 76%?

The second lesson is never underestimate the ability of a government to spend too much money.

State-owned DP World's bid would value P&O at around 29 times last year's earnings. In December 2004, DP World paid US group CSX Corporation just 14.7 times earnings for terminals in Hong Kong and South America. And that was the highest multiple paid for port assets since 2000. In other words, in comparable terms, DP World is shelling out about twice what it last paid for a set of ports.

Ports are indeed a scarce commodity at the moment. But as Edward Hadas on Breakingviews points out, "scarcity is a question of timing." There are many new big port projects being planned around the globe, and at some point P&O's ports will no longer be the scarce little gold mine they are considered to be now.

And DP World agrees that it is paying too much. Chairman Sultan Ahmed Bin Sulayem told the Financial Times: "This value is far more than anybody could have put on the company." He also complained to The Telegraph: "We have paid an enormous amount."

Which brings us to the third lesson - money always finds itself a home.

DP World might know it's paying too much, but with all those oil dollars flowing into Dubai, it's easy to forget about financial discipline. Look at the country's property market. Or its stock market, for that matter. That's why liquidity is such an appropriate term cash is exactly like water. If you unleash a flood, it's got to go somewhere and a port is as good a home as any.

It's just like the housing market in the UK and the US. Central banks give people access to more money by slashing interest rates. Inevitably, people then borrow as much as they can to get the best house that they can. This equally inevitably pushes up prices, so that eventually people are borrowing to the hilt to afford whatever hovel they can bear to live in.

But at some point even free and easy money runs out - there's only so much debt that people can carry. The UK housing market is now as flat as a pancake, despite current historically low interest rates. And for all the desperate talk of a revival, we wouldn't be at all surprised if the market takes another turn for the worse as the year progresses.

Detailed statistics from the British Bankers' Association reveal that fewer loans were approved in December for equity withdrawal than in any month since April 2000. Consumer borrowing was also weaker than expected. Credit card lending rose by just £0.2bn, while lending on loans and overdrafts showed no increase at all.

Consumer spending accounts for about two-thirds of the UK's economic growth. So if the consumers' flow of credit is reduced to a dribble, that doesn't bode well for the health of the economy. And a sick economy means lower house prices.

You can read MoneyWeek economist James Ferguson's latest take on the UK property market on our website, here: What's really going on in the property market

Turning back to the stock markets...

Spurred by bids and rumours of bids, the FTSE 100 ended at a four-and-a-half-year high, up 64 points at 5,786. Miners were also higher on continued strength in metal prices. Anglo American rose 3% to £21.87. Meanwhile, the mid-cap FTSE 250 soared 126 to 9,207 as a surprise move by Mittal Steel for rival Arcelor pushed Corus up 15% to 72p on hopes it will be next. For a full market report, see: London market close.

Over in continental Europe, Mittal's bid for Arcelor helped drive the Paris Cac 40 up 80 points to 4,956, its highest level since mid-2001. The German Dax jumped 98 to close at 5,647.

Across the Atlantic, US markets made gains. A weak fourth quarter GDP reading added fuel to hopes on Wall Street that the Federal Reserve will stop raising interest rates sooner rather than later. Economic growth fell to its lowest in three years, sliding to a 1.1% annual rate in the last three months of 2005. The Dow Jones climbed 97 points to 10,907, while the S&P 500 rose 9 to 1,283. The tech-heavy Nasdaq gained 21 to 2,304.

In US trading hours, oil was sharply higher, trading at around $67.80 a barrel in New York, while Brent crude was trading at nearly $65. Meanwhile, spot gold eased a little, to trade at around $558 an ounce.

In Asia, shares in steelmakers were higher amid hopes of further consolidation in the sector. Meanwhile, Japanese factory production grew for the fifth month in a row, the longest period of expansion since 1999.

And our two recommended articles for today...

How to value mining exploration stocks

- Mining exploration stocks don't have any assets other than management - so how do you value them? The answer is 'with difficulty', says gold commentator Paul van Eeden - but there are ways to shift the odds of success in your favour. To learn how he does it, click here: How to value mining explorers

Why Blair is leaving a toxic legacy for Brown

- Tony Blair's decision to give away £7bn of the UK's EU rebate could have been avoided, says Brian Durrant in The Fleet Street Letter. But Mr Blair doesn't care - he will be out of office by the time the bills start flooding in. But Gordon Brown might not be as happy. To find out why Mr Blair's deal was even worse than most of the papers reported, click here: Why Blair is leaving a toxic legacy for Brown

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.