COMMENT
Investing Lessons Of 2004

Each year the stock market continues to confound even the best investors. There's always something new to take on board, or some new way to refine your approach to investment.

Here are four takeaways from the last twelve months:

Don't play last year's game

In other words, whatever worked best last year is highly unlikely to continue being successful. Small companies enjoyed a bumper 2003 for example. However, in 2004 their returns were far more mediocre.

The stock market likes its fads. Every so often, a company or sector becomes ultra-fashionable and demand for the shares concerned pushes prices far in excess of their fair value. Fashions change of course, and then prices get reacquainted with the force of gravity.

Markets can be calm

In the last few years, we've got used to the stock market becoming ever more volatile. That was good news for traders – the smart ones at least - as it provided them with more opportunities. But 2004 was notable for being, well, rather boring. For example, the FTSE 100 index has traded in an unusually narrow range of 4,300 to 4,800. Many traders have come unstuck as a result.

This lack of volatility was one of the reasons hedge funds struggled to repeat their successes of recent years (the other main reason being every man and his dog thought he could reclassify his fund as a hedge fund and instantly generate returns 15%-20% each and every year).  

Lower returns are more typical

It looks like the UK market will return about 10% in 2004. Pretty good compared to the three years of losses we saw from 2000 to 2002, but lacklustre when sat next to the 20%+ gains seen for most of the 1980s and 1990s.

But returns of around 10% are actually fairly realistic for the long term, given the low levels of inflation we're seeing at the moment. That's not to say you should expect to see the same sort of return each and every year. But if you can generate this level of return in the long run, it's likely that you'll have done better than the majority of other investors.

Debt still sucks

Unsurprisingly, all the big losers of 2004 were heavily debt-laden. Of companies that began the year in the FTSE All-Share, owners of Courts, Henlys and Mayflower have seen total losses after administrators were appointed. The only two other companies with losses of over 80%, namely Jarvis (LSE: JRVS) and Planestation (LSE: PTG), also have big debt problems.

Investing in companies with lots of debt is very risky. In some cases of course, it can pay off handsomely, if the company makes a decent recovery. You need a lot of luck though. In many cases, the debt burden is simply too much for companies to bear, and that leads to a heavy or total loss for shareholders.

More:

• The Star Performers of 2004
• Top Profit Warnings of 2004
• The Highs & Lows of 2004
• Emerging Markets on Top in 2004
• Investing Lessons of 2003, 2002 & 2001.