20 JANUARY 1961, Page 24

Investment Systems (2)


ALTHOUGH the old cyclical investment policy may be inapplicable today, the new

shortened business cycles created by the alternation of monetary measures of restraint and relaxation—the Tory Gov- ernment's strangely idiotic con- tribution to the problem of economic equilibrium! — have caused sufficiently wide move- ments in equity share prices to justify, perhaps, an attempt at a new cyclical investment system. Indeed, the temptation to the hardened specula- tor to try and sell at the top and buy at the bottom is usually irresistible. The rewards for success are too good to miss.

For example, taking the Financial Times index of industrial share prices, if the speculative inves- tor had put £10,000 into equities at the bottom of that index in November, 1949, sold out at the three subsequent tops (June, 1951; July, 1955; July, 1957), re-entered the market at the three subsequent bottoms (June, 1952; November, 1956 (Suez); February, 1958), and finally sold out at the top on January 4, 1960, his fund would have accumulated to £66,038, whereas, if he had stayed 'put' in the market it would have risen to only £34,290. Of course, the latter is not a bad advertisement for staying 'put,' but if a 100 per cent. success (admittedly unobtainable) in apply- ing an 'in and out' policy would have more than doubled the capital profit, even a 50 per cent. success would justify an attempt, that is, if you have the Keynesian gambling spirit.

There are various systems, based on chart reading, to help the adventurous investor on this speculative course. The famous 'Hatch' system was invented by the late Hargreaves Parkinson, one-time editor of the Financial Times and author of Scientific Investment. Cyrus Q. Hatch was a mythical American investor who received a legacy of $100,000 in 1883 and by applying the simple rule of buying equities if the Dow Jones index rose by more than 10 per cent. and selling if it fell by more than 10 per cent., he amassed a fortune which was valued at $2,055,000 when he died in 1938. His son, Aloysius Hatch, brought his father's system to England. When he had invested his capital in equities he did nothing as long as the monthly average of the Financial Times index went on rising, but when the daily index had fallen 10 per cent. from the previous high monthly average he sold out everything. He re-entered the market when the daily index had risen 10 per cent. from the previous monthly average low. According to the editor of the Investors' Chronicle, Mr. Harold Wincott, a portfolio of £100,000 invested in 1925 and manipulated along these lines would have be- come £1,075,000 by March, 1960; but Mr. Win- cott was careful to point out that Aloysius Hatch would have done almost as well if he had stayed 'put' in the market. In fact, if he had invested at the bottom in 1940 and had remained 'in,' he would have done far better, for between 1925 and 1940 the system would have forced Aloysius to make several unprofitable entries into the market.

Now Mr. E. H. McDougall, a director (1 Investment Intelligence, has discovered a better way to use the Hatch system—by taking it twelve-month moving average instead of monthly average. The investor, he says, should wait to see when the twelve-month moving average cuts across the line of the daily index' When this happens on a rising trend, it is buying signal. When it happens on a falling trend, it is a selling signal. Mr. McDougall took a period of twenty-eight years from 1932 and found that there were ten round trips for Aloysius Hatch, of which five were unprofitable, while there were only eight for his new system of which only one was unprofitable. In fact, over this period the McDougall system would have turned £100,000 into £1,251,000 — against £750,000 under the Hatch system. What is more significant, Mr. McDougall would have done 100 per cent. better than the investor who left his 1925 'index' portfolio undisturbed.

These statistical exercises are great fun and will no doubt encourage the speculator to try his hand at hitting the tops and bottoms in the equity share markets, but I cannot recommend these so-called investment systems either for the professional or private investor. I agree that the chart studies on which they are based are extremely valuable as a guide to public senti- ment. Every serious investor should know whether the public is in a 'bull' or a 'bear' phase before he decides on the act of investment or dis investment. The chart studies give him that knowledge, but that is as far as they go. SecuritY price indices point to the prevailing market mood (when some indices, are restricted, as the Financial Times index is to thirty shares, they are not so reliable at that), but they are not a pointer to intelligent investment. Every day some equity prices are rising and some falling. The daily index average merely reflects the mean of thousands of investment decisions to buy or sell. These investment decisions are not usually based on exact knowledge either of

the state of the economy or of the state of th particular company whose equity is being bough or sold; they proceed partly from emotions 0 confidence or fear aroused by the headlines 0 the daily press, partly from some force majeti (e.g., deceased or other accounts which have per- force to be sold). and only partly from real thought and knowledge. Leaving aside the know ledge of the 'insiders' (company directors and friends) the thought of even the thinking in- vestors has not begun to appreciate the full effects of Conservative techniques of economic control and management. The prevailing form of restraint or relaxation apply only mildly II the whole economy, but fiercely to special tradest The motor and other consumer durable trade* may be plunged into a slump by hire-purchase controls, while other consumer and service trades are allowed to flourish on the fat of the Welfare State and wage inflation.

These irrational government discriminations are ignored by investment systems which work on an average of security prices. When the law of averages says sell, everything must be sold; when the law says buy, everything must be bought. But this ignores the lunatic distortions set up by government controls. So my conclusion is: watch the charts for the investment mood, apply the Hatch-McDougall system, if you like, to the cyclical trades suffering from government controls, and stay put in the sheltered consumer- service trades till the real crisis comes.