FOOL'S EYE VIEW
You're Already Investing

By Rob Davies
February 22, 2001

Carburton Street, London -- Last week BP Amoco (LSE: BP.) announced record profits of nearly £10b. This provoked a storm of indignation from some quarters of the media, much of it from the BBC, who fuelled the debate by wheeling out a fossilised Trade Union official on Newsnight to fulminate against this iniquity. The Beeb returned to the issue on Question Time when David Dimbleby took a question on whether a windfall tax should be imposed on the oil companies. Surprisingly, most of the panellists were in favour.

I found this quite extraordinary. After all, hadn't the whole point of Thatcherism, and now New Labour, been that we should reward risk-taking and not penalise success? Moreover, there is a very real link between the success of British companies and our domestic lives that none of these participants in these programmes seemed to make. This just reinforces the view that the stock market is for "rich people" and that ordinary people are just poor consumers. How wrong that view is.

No one in all these discussions mentioned that 6m households have 11m endowment policies between them. Much as The Motley Fool dislikes them the reality is that many homeowners have one to back an interest-only mortgage. Every single one of those investments would have a shareholding in BP and house buyers are relying on these endowments growing sufficiently to meet the mortgage. They want BP to do well, make lots of profits, pay dividends and expand the business and become more valuable.

However, even that misses the wider picture. In addition to those endowments over 9m ISA accounts with £16b worth of shares were opened in the last tax year. On top of that there are another 20m people with pension funds. These funds, whether occupational or private, would hold shares, certainly including BP. So that takes us to 35m equity investors, but there would obviously be some overlap. Allowing for people who have pensions, ISAs and endowments, or some combination of the three, there are perhaps 20m indirect equity investors. In a population of 59m people that means about 30% of the country has a a vested interest in the equity market.

But it doesn't stop there. A house or a car owner will have an insurance policy and the premiums will be invested in shares as well. The better equities do the more competitive are the insurance quotes. But the public, and much of the media, don't make the connection between the profits made by such corporate successes as BP and their own financial well-being, because the shares are held by third parties.

Unfortunately, BP's bumper profits are all too rare, and profit warnings have been more regular fare this year, one reason why the stock market has been weak of late. I bet the TV won't give much, if any prominence, to today's news from the Prudential (LSE: PRU) that its bonus rates in its with profits fund for 2000 are 4.5% for its Prudence Bond and 5% for the personal pensions. Both figures are 0.25% lower than last year. At that rate quite a few insurance companies will be writing to policyholders advising them that their endowment might not meet the mortgage liability if annual returns fall to 6% or even 4%. The last thing the investing public want is a windfall tax, or even the threat of it, to reduce market returns even more.

So, I guess if the questioner had phrased the question along the lines of:

Would the panel favour the introduction of a windfall tax on BP, even if it meant many homeowners would face endowment shortfalls on their mortgage?

the panel would have been a little more circumspect in its attack on Big Business. If they had had enough sense to see the connection with voters being made worse off I am sure their comments would have been more circumspect.

Nevertheless, it is this sort of knee-jerk public comment that reinforces the public antipathy to the stock market. The misconception that investing in the stock market is limited to those who own shares directly is still widespread. In reality, probably a half, and perhaps as much as a two-thirds, of that Question Time audience were shareholders in BP. They just didn't realise it.

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