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MARKET COMMENT
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At the end of the last two years, we've run pieces called 'Investing Lessons'. However, for this year, we're going to recap some of the points made twelve months ago, as they are all still perfectly valid! 1. Shares can fall 2 years in succession. Better make that 3 years! As we saw last week, there have only been two other occasions since 1869 when we've had a three losing years in succession. A fourth would be unprecedented -- in recent times at least -- but cannot be ruled out. Even if you think shares are cheap, they won't go up unless enough people agree with you and they have the cash to back up their feelings. Over the longer term, value should get recognised of course, but it can take a lot longer than you think. 2. Technology shares can fall even further. Last year we looked at five popular technology shares that fell heavily in 2000 and saw that they had fallen even further in 2001. The less said about their performance in 2002, the better!Company Name Fall over the year
Like the market as a whole, just because something has fallen in price, no matter how far, does not necessarily mean it is cheap. It could still be expensive albeit not quite as expensive as it was before.
2000 2001 2002
Marconi (LSE: MONI) 34% 95% 96%
Colt Telecom (LSE: CTM) 55% 93% 66%
Psion (LSE: PON) 47% 70% 38%
Cable & Wireless (LSE: CW.) 14% 64% 85%
ARM Holdings (LSE: ARM) 39% 33% 85%
FTSE 100 index 10% 17% 25%
3. Fallen stars can bounce back.
Not all companies keep on falling. Here's a selection that have given their shareholders a pleasant ride in 2002.
Company Name Gain in 2002The bounce back by Lastminute.com (LSE: LMC) in particular has been quite remarkable. Not many people would have bet on it being one of the top performers of this year. And don't forget Railtrack (LSE: RTK) coming back from the dead!
Lastminute (LSE: LMC) +250%
Brake Brothers (LSE: BKB) +66%
Arcadia (LSE: AG.) +60%
Robert Wiseman (LSE: RWD) +57%
New Look (LSE: NEW) +45%
Last year we highlighted the downfalls of Independent Insurance and Railtrack. This year we can add several more examples. How about British Energy (LSE: BGY), Marconi (LSE: MONI), MyTravel (LSE: MT.) and Telewest (LSE: TWT), all of whom have announced major refinancings. Then we have the likes of BAE Systems (LSE: BA.), SFI (LSE: SUF), Amey (LSE: AMY) and Cable & Wireless (LSE: CW.), who appear to have been somewhat lax in keeping their investors fully informed with events. The general lesson: have a broad spread of shares. Not so many that you can't keep tabs on them all, but not so few that one or two mishaps could be fatal for your portfolio.
5. Debt can be very bad for your wealth.
Last year we said "the number of companies who are struggling under massive debt burdens is astounding. The simple lesson - avoid them". This still applies and we've seen plenty of examples of what happens when revenues fall at a heavily indebted company. Debt ranks before shares when a company gets wound up. This fixed claim on the company can mean shareholders are left with next to nothing, just like the effect of negative equity when you own a house. Gearing is a double-edged sword.
6. The dividend is not dead.
Dividends are alive and well. Many of the top companies on the UK market increased their dividend payouts in 2002. Around three-quarters managed an increase and a third even managed an increase of more than 10%. Whether this pattern will be repeated in 2003 remains to be seen. However, it does show that there is considerable underlying strength in the market despite the sharp falls we have seen this year.