FOOL'S EYE VIEW
A Hot Tip For 2002

By Stuart Watson (TMFTiger)
January 2, 2002

Great Titchfield Street, London -- Aaaaargghh! It always seems to sneak out at some family do over Christmas. It's the dreaded question: "You're meant to know about financial stuff, got any hot tips at the moment?"

I'd like to say I came up with a well-reasoned argument advocating long-term investment and why you should steer clear of random tips at all costs. But it was late, the wine was going down nicely and thankfully the subject was swiftly changed to Tottenham's prospects for reaching the Worthington Cup Final (and a possible mass family outing to witness such a rare event!). But how might the conversation have gone?

Uncle Igor: Pass the port. No the other way. So, seeing as you're meant to know a bit about this financial gubbins, you must have some hot tips for us. What's the secret?

Tigger: Tips? Not really. The more you look at investment, the more you realise that no one really knows what any given share is going to do. Same with interest rates and pretty much everything else. So the most sensible approach is to position your money so that you will benefit from the most likely outcomes. So I still like index trackers and the long-term prospects of the stock market as a whole. The secret, if there is one, is that there is no secret. It's difficult to beat a tracker over the long-term. If you haven't got the time or the dedication to put in a lot of work picking shares for yourself, and most people haven't, a tracker is usually your best bet.

Igor: Geesh! Duller than a Saturday afternoon at Highbury! So you don't even know one company whose share price looks like a good bet then?

Tigger: Well, I like a few at the moment. But nothing stands out as outstanding value. It's rare to get a one-way bet. Even though I think a few look cheap, that doesn't mean that they will go up. They won't do that unless other people agree with me and they start buying the shares too. On top of that, I don't know what sort of risks you're prepared to take on, or how long you want to invest your money for. In other words, a share that I might be willing to invest in might not be right for you.

Igor: Try that Stilton by the way, before it crawls off the table. I think I'm beginning to see your point. I'd like to nip in and double my money in a year. Only a relatively small sum, mind. I wouldn't want to tie my money up for more than a couple of years.

Tigger: You need to have more realistic expectations. Doubling your money in a year is very, very unlikely. You certainly can't do it without taking on a lot of risk. You're equally likely to lose the lot as well. That's the trouble with shares. Everyone chases rainbows and ignores the low hanging fruit. It's not a race. You don't need to beat the market to generate good returns. If you're only willing to invest for a couple of years, the stock market isn't really the place to be. Over those time frames, shares can be very volatile. Just look at what has happened in the last two years; shares have fallen by about a quarter!

Igor: Yes, I sold most of my stuff a few months ago. I didn't want to lose even more money. How can you possibly still advocate a tracker after how they have performed in the last two years?

Tigger: Now you're making one of the classic mistakes people make with their money. They assume immediate history is indicative of what is going to happen in the future. This is why most people buy near the top of the market and sell near the bottom.

Igor: Yes, that's true. I piled in quite heavily at the end of 1999. Everyone was talking about those tech shares down the golf club. I saw that the market has actually recovered quite a bit since I sold out too. Typical isn't it!

Tigger: It does seem to happen over and over again. But it's nothing to be ashamed of, though. It's mass psychology. It's hard to distance yourself from what everyone else is doing. You shouldn't buy just because everyone else is buying and you shouldn't sell just because everyone else is selling. In fact, it often pays to do the opposite. If everyone is buying, the excess demand usually means prices will be driven up too high, higher than the shares are probably worth anyway. And likewise, if everyone is selling, shares may be too cheap.

Igor: So I should pile in now then, as the market has fallen for two years on the trot? All my mates at the golf club haven't talked about their portfolios for months. They broke up their investment club, too.

Tigger: You can't tell when the turnaround will come. But I think the long-term prospects look good. In the last eighty years or so, the market has fallen in two successive years on seven occasions. On two of those occassions, it fell for a third successive year too. But in all cases, the next five years following these falls showed some healthy gains.

Igor: I might phone the old broker on Monday then.

Tigger: Not so fast. It all depends on how everyone else in the market reacts as well. On top of that, we've just had a 20-year period where shares did very little else but carry on climbing. It's easy to argue that the market still needs to catch its breath. I like to stay fully invested, as I believe you can't predict when the market is going to rise, only that it is more likely to rise than fall in any given year. So I'm prepared to sit through the inevitable short-term losses.

Igor: I should know better than to ask these questions really. Anyway, back to footie.

More: Learn more about index trackers -- visit the Motley Fool's ISA Centre

The author doesn't really have an Uncle Igor or have a photographic memory for annual stock market returns. But he does support Tottenham and he considers it ideal training for facing prolonged bear markets.