Baker Street, London -- The markets seem unable to decide whether the recent correction is over or not. Both the leading US and UK indices, the Dow Jones and FTSE 100 respectively, are now about 10% lower than their highs this year. Last night Wall Street recovered from its opening plunge to end the day all square. This bounce had the opposite effect on European bourses. This morning London leapt by about 60 points, only to drop back into negative territory in the afternoon. But when the American markets reopened for business only slightly down this injected some confidence into the UK and the FTSE 100 regained its positive position by the close of play.
South African shares moved to the top of the FTSE 100 leaderboard today. It is now several months since Nelson Mandela relinquished power as president of the fledgling democratic state. The fragile peace seems to be holding, though, and investors are looking on the republic with renewed confidence. The 15% jump in the gold price over the past week has also helped matters, since the commodity is one of the country's principal exports. Giant financial services group Old Mutual(LSE: OML) rose 4.5p to 130.5p, after a merger was proposed between two of its rival South African financiers, and brewing behemoth South African Breweries(LSE: SAB) was up 18.5p at 498p.
It helped that these two companies were in the most talked-about sectors regarding takeovers. Rumours are rife about tie-ups amongst both financial and drinks stocks. Brewers on the rise included Scottish & Newcastle (LSE: SCTN), up 9.5p to 619p, Whitbread (LSE: WTB), which jumped 20.5p to 765p, and Bass (LSE: BASS), improving 15.5p to 760p. Following its failure to win control of Allied Domecq's (LSE: ALLD) pubs, Whitbread has decided to splash out £78.3m on a string of six London health clubs to fulfil its expansionist desire.
Major mortgage lender Halifax (LSE: HFX) was the financial stock highlighted as a takeover target by the market today. The group's shares kicked up 23p to 748.5p.
Technology companies were also back in focus today as bargain hunters moved in following the large scale sell-off on tech-heavy Nasdaq in recent weeks. FTSE 100 members Sema (LSE: SEM) improved 27p to 760.5p, fellow blue chip Sage (LSE: SGE) was up 55p at 2715p and Qualiport stock Misys (LSE: MSY) jumped 19.5p to 584.5p.
Heavyweight oil stocks helped the FTSE 100 into safe waters this afternoon. The EU gave clearance to London's leading company BP Amoco (LSE: BPA) to go ahead with its proposed $32b purchase of US refinery operator Atlantic Richfield. This lifted the oil giant's shares by 27p to 1092p. Shell (LSE: SHEL) rose 9.5p to 456.5p as well.
Elsewhere tiny logistics company Kewill Systems(LSE: KWL) outlined plans to spend £6.3m on e-commerce development. This will allow customers to track their deliveries over the net and thus save money and become more flexible in managing supplies. This sent the shares up 86.5p, or 21%, to 506.5p.
Legal & General(LSE: LGEN) dropped 8.25p to 172.25p today as its growing status as the UK's financial tart gathered momentum. The Bank of Scotland(LSE: BSCT) revealed, when reporting interim results this morning, that it had spoken to L&G about a merger over six months ago. Since then L&G has also had been bid for by NatWest (LSE: NWB), down 28p to 1423p, and now the Bank of Scotland wants to buy NatWest as long as L&G isn't involved. This prostitution doesn't seem to be helping L&G's cause much at all. However, the Bank of Scotland said pre-tax profits rose 12% to £471m in the first half, smashing analysts' forecasts. Despite this the shares fell 21.5p to 724p.
Other financial stocks on the slide, as the merger hot air cooled, included Norwich Union(LSE: NU.), off 19.25p at 441.5p and Abbey National(LSE: ANL) which dropped 40p to 1059p.
Profit takers also assaulted the Prudential (LSE: PRU) this morning, as the much-heralded details of the flotation of the insurer's Egg online banking arm failed to materialise. The shares shed 18p to 901.5p.
Other Internet-related stocks, apart from Freeserve (LSE: FRE) which went up 0.5p to 138p, suffered slightly today. Alternative stock exchange operator Tradepoint (LSE: TFN) fell 7p to 159.5p. One of the group's major shareholders and development partners is Reuters (LSE: RTR). Following last week's downgrade in the information provider, dealers marked down Tradepoint as well. Tiny Internet service provider Affinity Internet(LSE: AIH) was off 30p at 257p following large rival Freeserve's reasonably strong first quarter results yesterday.
Larger media players Pearson (LSE: PSON), EMAP (LSE: EMA) and Granada (LSE: GAA) were also hit. Pearson said it planned to spend £40m on its prime website FT.com. Perhaps fears of profit erosion put investors off and the stock dropped 28p to 1253p. Meanwhile magazine publisher EMAP shed 52p to 826p despite a reasonably bullish trading statement from the Qualiport company this morning. Dealers highlighted the slight scarcity of advertisers in the first half of the year, though. Granada joined in the bearish trend, falling 23p to 533p.
Finally mid-cap property company Peel Holdings(LSE: PEEL) scrapped its plans to go private at a premium in an MBO. This sent the shares down 48.5p to 604p.
Some Fools may have seen an article in the Financial Times this weekend entitled 'Index trackers have had their day'. We had a few posts about it, and it seems appropriate to restate our views on this matter. The article was written by David Schwartz and, I must be frank, this guy gets right up my nose. Although I haven't read the article, I have managed to piece together enough information about it from our message boards thanks to Fools such as gmoutchia.
Schwartz has a regular column in the Financial Times and appears on BBC2's Ceefax pages at the weekend. He has studied past movements in the London Stock Market and produced a book that tells us what have been the best days to invest on the market. For example he tells us that June 6 is the market's best day, where prices rise 77% of the time, whilst September 26 is the worst with prices rising just 28% of the time.
From what I know of statistics such an analysis is pretty useless, especially to the long-term investor. The spread of daily returns has been created by chance and depends upon what news is in the market at that time. Just because June 6 has been a good day in the past has no bearing on what will happen in the future. There is no correlation at all, unless the findings of Schwartz are widely known and believed by the market. Thankfully, that is not the case. It's a bit like those football commentators who say: "The last time these teams met in the FA Cup back in 1952, Fool Rovers ran out the winners 5-1. That will be weighing heavily on the players' minds today". We think not.
Schwartz also said that the average real return of the stock market over the last 80 years was just 3%. A classic example of journalistic scare tactics. This figure is correct in one respect, but is taken out of context. A real return is discounting the effects of inflation, which has averaged 3.9% over the same period. But the scary 3% figure does not include dividend payments, which is a bit like trying to gauge the returns on gilts without including interest received -- i.e. totally misleading.
If all dividends paid out where reinvested on a gross basis then the average real return per annum over the last 80 years is 8.03%. Now 8.03% may not sound like much but as all Fools know, we need to consider the power of compounding. Over 80 years this percentage gain is enough to increase your money by 484 times, and remember that's after the effects of inflation. Admittedly such a time span is too long for virtually everyone at the moment, although that may not be the case in years to come. Even over 40 years, the length of most peoples' working lifetime, this is a gain of 22 times.
Let's have a look at some data from the long-term investor's bible, the Barclays Capital Equity-Gilt Study published in January 1999.
What can we deduce from this table? Firstly, deposit accounts aren't much use to anyone. Secondly, gilts aren't that much better. They have done well recently, but their returns are linked to movements in long-term interest rates. Trying to get a good return by investing in gilts is basically a gamble on interest rates. That's no different from trying to guess the short-term direction of the market. Very unFoolish!
The other thing we notice is that reinvestment of dividends has made up a large proportion of overall equity returns. Currently, the market is only yielding 2.4%. Do these low yields mean returns from equities will be lower in future? Again, this is missing the point. The key word is 'reinvestment' not 'dividends'. It is the reinvestment of additional money, compounding over time, that is important. Today, dividends are lower as surplus cash is also being returned by share buybacks or directly reinvested in the business. Either way this money still remains in equities and still has the opportunity to compound.
Schwartz also said "history teaches there is high volatility from one 20-year period to the next. A fine time to start a 20-year cycle was in 1980. But what if you are older and started a 20-year cycle earlier? A cycle that kicked off in 1950 would have gained 3.5% a year. A 1960 start date triggered a loss, of -3.9% a year. A 1970 start date gained just 1.0% a year by 1989. Clearly, investing is anything but safe, predictable and steadily profitable over the so-called 'long run'."
Aaaaaaaaarrgh!!
Again, he is ignoring the impact of dividends. Yet the table above, which does include dividends, shows that some ten-year periods have been generated poor overall returns. The 1970s, when the economy was shot to pieces, stands out. However, it is a common mistake to just examine a one-off cycle such as this. Put simply, it is not how most people invest. You have the opportunity to invest in numerous cycles. So had you invested in 1970, it is also likely you invested in 1971, 1972 , etc. Had you done so you would have benefited from investing in the low points such as 1973 and 1974, when the market fell in real terms by 36% and 60% respectively. Had you been bold enough, you might have invested even more than usual at this time. This is just the simple concept of pound-cost averaging.
Yes, there is a chance that by investing at any one point in time you may see a small, or even negative return over 10 years. But every time you invest the chances of an overall loss reduce dramatically. That's the key to long term success on the stock market. To pinch one of TMF Pyad's phrases, with regular investing you 'minimise the downside'.
We wonder how much money Schwartz has cost the UK public by scaring them with this misinformed article. If you ever meet him, feel free to give him a light slap and a disapproving glare, courtesy of the Motley Fool.
Following the success of the last two Foolish gatherings we are pleased to announce that the third get-together will take place next Wednesday, 6th October. The venue will be the Barley Mow pub in Dorset Street, London W1. This drinking hole is just around the corner from the Fool's UK HQ at 79 Baker Street. The nearest tube is Baker Street as well. So if you want to meet fellow Fools and catch up off-line, please join us in the pub from 7pm next Wednesday. For a taster of previous occasions take a look at the Foolish Social Events message board. To comment on any other matters please go to the Daily Fool message board.
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