FORSYTE
The perils which beset a private investor before the Big Bang
JOHN HOWARTH
In the first four months of 1986 the London market has moved ahead 20 per cent — most of it in the first two months when it seemed as though all the punters frozen out of Sedgefield and Plumpton had turned their attention in desperation to picking winners in the takeover stakes as a vehicle for their bets. Perhaps they had.
What a time, therefore, to start a private investment commentary. With virtually all the indices from New York eastwards still standing not all that far from their all-time highs, and with takeover fever not yet having relaxed its grip, it's a brave — not to say foolhardy — punter who expects to go on beating the averages. We had a slight indication of the dangers when the Dow Jones index in New York had an 80-point correction in the first week of April fol- lowed by another last week — and this, in turn, had its effect on London in two blood-letting sessions. What I shall be aiming to do in this space from time to time is to touch upon a few of the considerations the prudent might weigh before joining the rest of us in the fast-moving current.
Let's begin by going back to history. Some of you may well recall the Rowntrees cocoa debacle whereby a couple of eager commodity traders cost their employer some £34 million. More recently we had a similar, though mercifully less damaging, example with Gill & Duffus in Hong Kong, and this year we have the chaos in the International Tin Market, where several operators' dictum is no longer their pac- turn. 'If this is so,' you might well ask, 'what is to stop the practice spilling over into other fields of trading?' It's a good question; the answer has to be: 'Nothing.' The lesson this piece of history ought to teach the private investor is: stay away from commodities. If ever there was a market for the professionals then here it is. Forecasting is difficult enough by itself (especially, as the Chinese remind us, if it's the future you're trying to forecast), with- out having to allow for welshing and personal dishonesty as well.
Closely linked with this piece of advice must be another which says: 'Beware speaks bearing gifts.' Speaks are those salespersons who may telephone you out of the blue offering attractive 'opportunities' to invest in little-known second or third market stocks at stratospheric p/e ratios where 'confidentially, old man, I know there's about to be a spectacular break- through and where I believe a leading institution is getting very interested.' These calls — or it could be printed material — often come from Rotterdam or Amster- dam. Throw the letter away or, if it's a phone call, employ the police whistle you keep handily by to ward off the obscene whisper. 'How did they get my name?' you might ask. The answer is probably that attractive offer for sale you applied for successfully a few months ago. These days finance direc- tors have got to take their profits where they can, and shareholder registers are valuable properties. You will all have read and heard a great deal about the Big Bang. This will explode officially in October, though there will, hl effect, be a series of gentle pops in the coming months. What it means for the private investor is: 'It will cost me more ill commission.' The reason is that the big institutions — freed as they will be from paying fixed commissions — will negotiate paper-thin rates with the market makers. Some fund managers are confidently ex" pecting to pay no commission at all 00 many bargains. le That being so, it follows that the litt man and woman will be paying more; after all, somebody has to keep the City in tjhe style to which it has become accustomeu. All the more reason, therefore, to make your investment pay and avoid, as far possible, the obvious pitfalls. When all Is said and done investment is a serious business — especially if it's your m°11eY they're investing. If ever there was a time to hold proper companies in your P°11- folio, this is it. When short-term considera" tions and takeover speculation start to take precedence, as they are tending to do now' then mind your eye. Trustees are comillat; ing performances of their fund manager against the competition on a quarterlY even monthly — basis, egged on bY th„f league tables published in the columns the financial journals.
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This, to me, is dangerous stuff. For of us at our private end of the market viit want the game to go the full 90 (all then, 80) minutes to pay our pensions -to whatever. When the froth not only rises e the top but starts to fill the whole glass, vi should get nervous. The new financial year has not Wog begun and this is a good time to sit doviwo with your financial adviser and write d°. es precisely what your investment objecuv.,l1 are. Only when you have done that hat anybody be in a position to tell you w stocks — or other investments — tObt/Y.
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