Why I think Tim Price is dead wrong about stocks

Flicking through the Evening Standard recently, I noticed the following dismissive line: “For those interested in equities – although I cannot for the life of me see why anybody would be…”

OK – nobody pays much attention to the Evening Standard. But now MoneyWeek’s very own Tim Price has weighed in with his own damnation of us faithful equity investors. Last week he wrote a piece in the magazine, telling readers to “forget shares – your money is better off elsewhere”.

The basic argument went like this: you can’t make money in shares unless you are “terribly smart, extremely comfortable with volatility, or very, very lucky.” Well, nobody other than a committed trader tries to make “a fortune in stocks in a relatively short period” and I would be the last person to recommend shares for daily punting.

But if ten years doesn’t count as a “relatively short period” in the Price timescale, then I offer in evidence the ISA that I have been managing for my wife for the last ten years.

In a recent idle moment, I calculated the return on this portfolio, and it came to about 27% per year. I have got to admit that even I was surprised by this – although I should add that these are only my back-of-an-envelope calculations. But I do know that if I take my wife’s total ISA contributions over the last ten years and multiply them by three the figure is still below the value of her ISA portfolio today.

The more I research, the luckier I get

So have I been “very, very, lucky”? Definitely not! When it comes to my ISA – especially my wife’s ISA (!) – I am a conservative investor. I believe in a portfolio of ten to 20 shares, with low turnover.

Have I been ‘extremely comfortable with volatility’? I don’t suppose I am any different from any other stock market investor in that I prefer volatility when it drives share prices upwards than when it hammers them downwards. But I have learned not to care. Volatility is a fact of life, so there is no point in worrying about it. You should never commit money to the stock market unless you expect to leave it there for at least two years, and if you stick to that rule the daily lurches of the market are neither here nor there.

So that leaves “have I been terribly smart?” I consider myself to be quite a sensible fellow; I know how to interpret financial statements and I know basic parameters for valuing shares. But so do lots of others, and they would not call themselves “terribly smart” any more than I would.

I invest in companies, not stock markets

But then, I do not invest my money in ‘the stock market’. I invest in companies – companies that happen to have their shares traded on the stock market. This is crucial. Tim Price produces some statistics demonstrating that the long-term returns from “the UK stock market” have not been that great. So what? Who but fools only buy indexed funds that invest in the whole market? The fact is that many shares have delivered great returns over the last ten years.

Looking at just the FTSE 250 and AIM, I count 145 shares that have doubled shareholders’ cash in the last five years. For sure, some of them – natural resource plays, for example – have been ‘lucky’ by being in the right place at the right time.

But a close look at some of the other top performers – Abcam (ABC), Lo-Q (LOQ), Asos (ASC), Imagination Technologies (IMG), Telecom Plus (TEP) and Aggreko (AGK) reveals some common characteristics. A focus on one central business proposition. Innovative products. Good financial characteristics, like positive cash flow. Stable managerial teams.

It is quite easy to make good money in shares by buying into businesses that have such merits. The trick is to reject everything else and learn to live with stock market volatility, which is not so difficult once you get used to it.

As for Price’s favoured alternatives, he describes the bond market as ‘an oasis of sense and rationality’ – do I recall investors happily piling into Greek bonds at sub-5% yields just two years ago? He likes gold, which is an outright speculation with little real commercial value. And infrastructure funds and insurance-linked investments, opaque vehicles for which investors pay substantial fees to money managers in return for dubious returns.

I’ll stick to my task, thanks: seeking companies that generate value for their customers, and hoping to profiting along with them.

• 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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