MARKET COMMENT
Why Shares Are Finer Than Wine

By Cliff D'Arcy
April 4, 2003

In late January, the delightful and charming Fiona Glover was interviewing me on Radio Five Live. The UK stock market was in the process of recording its tenth consecutive daily fall and, understandably, we had plenty of nervous investors calling in.

I was all set to explain that, in my view, many shares were attractively priced. I'd also prepared some figures to prove that over the long term, shares have beaten all other mainstream investments, including government and company bonds, property and cash.

However, what I wasn't expecting was a call about the merits (or otherwise) of 'alternative investments'! One caller announced that he no longer invested in shares, preferring instead to buy antique furniture and then wait for it to appreciate in value. I suspected he was an antiques dealer looking for some free publicity!

The problem is that the buying and selling of certain commodities (art, antiques, cars, coins, stamps, whisky and wine) is not investing as I see it. Here's why I'm cagey about 'alternative' investments.

Shares in most listed UK companies are traded on the world-respected London Stock Exchange. Being traded on a recognised and regulated stock market means that:

• you're buying a stake in a real business so, broadly speaking, your capital should increase as the company succeeds (or otherwise!)
• you become an owner of the business, with the right to participate in the company's strategy and performance
• most shares pay dividends, which provide a valuable source of income to shareholders
• depending on your means, you can take very small or very large positions in shares
• it's easy to decide your exit point for when you need the money (for example, on retiring)
• shares are easy to value, as prices are quoted throughout the market hours (8am to 4.30pm)
• shares are very simple to trade (dozens of brokers and market makers facilitate buying and selling)
• many stocks are very liquid, which means that large numbers of shares can traded be actively (particularly those in the FTSE 100)
• it takes seconds to buy or sell using an online broker (or only a couple of minutes by telephone)
• there is fierce competition between brokers, which has brought down dealing commissions to very low levels (so charges don't eat up a lot of your investment).

Compare this with alternative investments:

• it's a lot harder to understand what you're buying
• they don't pay any income
• alternative investments aren't traded on any recognised exchange, making it far more difficult to trade them easily
• you rely on an "expert" opinion to establish value (which could be very wrong!)
• it's often incredibly hard to prove if an item is genuine or fake
• the value of an item heavily depends on its origin (its "provenance")
• it's hard to know how much risk you're taking (what if your prize collection suffers physical damage or is stolen?)
• these markets (and salespeople) are entirely unregulated
• often, goods change hands within only a limited group of collectors
• auction houses pocket substantial commissions (whether you're buying or selling), which eats into your returns
• they are inflexible and it's damn difficult to get your money out in a hurry (you can't sell just one table leg from your Chippendale cabinet to pay for your holiday!)
• advertising is often misleading, promising unrealistically high or allegedly guaranteed returns that fail to materialise and there have been countless cons, scams and scandals in this field (oops, sounds familiar!
• some companies do adhere to an industry code of practice but, if it does all go pear-shaped, you can't complain to the Financial Services Authority.

One similarity is that both fields do use a lot of jargon, which doesn't make understanding any easier for punters!

So, if you're thinking about investing outside of the mainstream, read A Plain English Guide To Investment to determine just how well these 'alternatives' stack up.