MARKET COMMENT
Only Monkeys Pick Bottoms

By Maynard Paton (TMFMayn)
July 31, 2002

After falling 28% since January 1 and closing at 3,777 last Wednesday, the FTSE 100 has since risen 11% to 4,200. So have we passed the low point of the 2000-2002 bear market? Who knows? And more to the point -- who cares? The greatest waste of time known to investment mankind is thinking about market bottoms.

To recap, investors largely fall into two camps: passive and active.

Having neither the time, inclination or experience to try their hand at outperforming the market, passive investors (should) use simple index trackers to get the best out of their savings. Typically, contributions are made on a regular monthly basis. As such, the passive investor -- through no skill whatsoever -- will invest throughout the market's lows.

In fact, having decided to go down the tracker route, the last thing on the passive investor's mind should be 'what's the market going to do next?' After a quick recollection of how shares steadily outperform over the long term and the advantages of pound cost averaging, they'll then turn their attention to other, far more important, matters -- like what to cook for their tea.

Then there's the active investor, the individual stock picker. Here, the stock market serves only as a long-term performance benchmark. When building his or her portfolio, the stock picker cares not for what the market (i.e. a general reflection of every share price) is doing, but just his preferred handful of companies.

In short, what matters to the active investor is being able to buy shares worth £1 for 50p. Such opportunities can occur when the market is high, low or just right. So why should the DIY share picker defer an investment until the stock market itself hits a low? When the stock market hits bottom, there's no guarantee any favoured shares will be trading at bargain prices.

That said, punters deluded with a magical feel for the market's ways still try and attempt the impossible. Unfortunately, market low points are only visible in hindsight. A quick lesson from history: after the 1973-74 bear market touched its nadir, the stock market rose 73% in just three weeks. At what point did the 1970s bottom spotters realise the market had finally turned? Sensible investors of today should leave the bottom picking to the monkeys.