The 30 March edition of MoneyWeek started on a depressing note.
Merryn Somerset Webb pointed out that “if you bought US shares at the peak of the market in 2007 and have reinvested all your dividends ever since, you are pretty much evens”. I’ll excuse Merryn for feathering her case by taking the peak of the market as her starting point. In fairness she could have gone back another five years and titled her report ‘A lost decade for stock market investors.’
But I wonder whether Merryn has paused to reflect upon the chart shown on page six of her excellent magazine. This showed the share price of Apple. Today the shares change hands at $618. Ten years ago you could have picked them up for less than $10. Even five years ago you would not have had to pay much more than $100.
Now there is no question that the FTSE experiences sharp rises and declines. But there is always money to be made if you know what you are looking for.
That’s why I write Penny Sleuth for you, to give you a chance to find that ‘special’ company, to identify a company that could be on the cusp of something outstanding and to get in on it just at the right moment. I’ll point to two later on. But first…
‘The time never feels right to buy shares’
Let’s cast our minds back to 2001, Apple had just launched its first iPod. In fact if you had been insightful enough and, instead of purchasing the $399 original iPod, used that amount to purchase Apple’s stock, you would be looking at a stock value of $26,374. This made me wonder how much impact financial journalists and their bearishness towards the US and most other equity markets has deterred investors from making lots of money by backing successful businesses, of which Apple is a prime but by no means unique example?
Last week I read of a man who had come into some money and was thinking of investing in the stock market. “The trouble is”, he fretted, “I am not sure that this is a good time.” Goodness knows how many other people, when presented with the chance to make a decent investment return in the stock market, teeter on the edge like this before backing off into the safety of building society accounts, with their derisory savings rates wrapped up in cosy marketing hype.
Let me tell you something straight. The time never feels right to buy shares. In my 35 years of investing, the economic outlook has always been somewhere between the ‘pretty grim’ and ‘downright awful’.
The route to despair
The list of things that investors have worried about – inflation, deflation, high interest rates, soaring oil prices, war, banking crises, competition from China (it used to be Japan, remember?) – is as long as your arm.
But if you buy the right shares, at whatever time, you will make much more money than by investing in anything else. Businesses have a way of adapting to the economic circumstances, but much more important than this is that every era produces a list of stock market winners and a list of losers.
Just as the fortunes of some types of business have been on the wane in the last few years – house builders, high street retailers, banks for example – others, in sectors such as technology and natural resources have been on the rise.
I absolutely refute the notion that you cannot identify the businesses that are more likely to be successful in the future from those that are not. That is the route of despair that leads investors into hopeless backward-looking indexed funds. And that’s not the only trap that investors can fall into.
The big problem with ‘asset allocation’
Over the last two decades it has become the established wisdom that ‘asset allocation’ is the key investment decision. In order to justify their existence the relatively new breed of investment strategists has peddled the idea that stock selection is a fool’s game and that the critical decision – the one that they of course are paid to make – is whether to invest in bonds, equities, commodities or property. I will gloss over the absurd but nonetheless accepted fallacy that hedge funds constitute an asset class.
It is obvious that if bonds outperform equities you should have more of your money – in fact all of it – in the former. But this pre-supposes that it is possible to predict the course of these markets in advance, and I don’t see anyone boasting a successful track record here. And it also treats all the equities within one market as if they were the same – which they most certainly are not.
A 600-fold return winner
To give you an admittedly extreme example, if you had switched your money out of Lloyds Bank into Apple ten years ago you would have improved your subsequent return about 600-fold. The divergence of performance between good shares and bad shares is enormous, far greater than that between one asset class and another. So, rather than attempting the impossible task of predicting the future of economies, share and bond markets, and currencies, investors should focus instead on spotting the next generation of Apples.
I have made far more money from shares than I think I could have done from anything else and the secret is to identify successful businesses, invest in them whenever you find them, and ignore the broader financial climate. For me, the ‘top-down’ approach to investment promoted by strategists, fund managers and even some of our financial journals is worse than a distraction. It is a complete waste of time.
If you do have the confidence to go with your instinct and go against the tide, this could be the opportunity you’ve been waiting for. In fact I think that there are at least two Aim-listed stocks that could offer at least a 100% gain in the next 12 months.
These are just the kind of stocks that have helped me make money in four of the major recessions I’ve invested through. In my experience, great innovators like these can see out even the toughest times in the economy.
It’s risky. It often takes a serious leap of faith. But it’s simply the best way I know how to make money.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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