The real trick now is finding truly cheap companies. Is that telling us something?
The FTSE 100 closed last week at its highest level in almost a year, just above the psychologically irrelevant level of 5,000. The Great Stock Market Rebound of 2009 continues relatively unabated.
Somewhat amazingly, given what the world economies have been through during the past twelve months, the FTSE 100 is only down 7.5% over that same period.
In September last year, if you'd switched off your computer, packed your bags and headed off to the nearest deserted island for a twelve-month detox/sabbatical, you'd be thinking a 7.5% fall in the stock market was just one of those little blips that comes along from time to time.
Reality has been very different, as we know. The story of the past twelve months is something for another day, but I think we can all agree it was an interesting time!
Only Down 7.5%
Is the fact that the market has 'only' fallen 7.5% telling us something about investing? Is it telling us we should ignore the daily ups and downs of the market and invest only for the long term?
Yes and no. Try telling an investor in Royal Bank Of Scotland (LSE: RBS) or Lloyds Banking Group (LSE: LLOY) investing in those once seemingly great UK companies was a buy-and-forget decision. Over the past twelve months, their shares are down 76% and 63% respectively.
On the other hand, investors who bought Marks & Spencer (LSE: MKS) and Tullow Oil (LSE: TLW) twelve months ago are more likely to be patting themselves on the back and laughing all the way to the bank. Shares in those two FTSE 100 companies are up 49% and 39% respectively.
One thing is certain. Individual share picking is not a buy-and-forget decision, apart possibly from only a precious few high-quality companies.
If you'd been closely following Royal Bank of Scotland, for example, you could have bailed out before everything went pear shaped, or you could have bought more when the share price plunged to near 10p at the start of this year, and be sitting on a 400%-plus gain from that low point.
Investing Is Simple
Of course, investing is incredibly simple when looked at through the rear-view mirror.
It seems so obvious now, in hindsight, that Marks & Spencer was a good buy at 200p and 250p, and that buying banking shares in January this year was a no-brainer.
Anyone skilful enough to grab some Barclays (LSE: BARC) shares at the bottom would be sitting on a 600%-plus profit.
Unfortunately, you can't make a profit by looking at the past. And it's tough to make a profit by being a buy-and-forget investor in individual companies. If you do want to go down the buy-and-forget route, make regular contributions into a low-cost index-tracking fund. The person who did that over the past twelve months, a period where the market fell 7.5%, would be ahead of the game today.
Where Next For The Stock Market?
All that is in the past. The big question now is what's next for the stock market? I'm giving up making predictions, for today at least. I don't know which way it's going to move today, tomorrow or next week.
I'm looking to the future. I'm looking at an economy I think will show relatively anaemic growth over the next few years. That may sound boring and pessimistic, but it's a hell of a lot better than what we've had over the past eighteen months.
I'm looking at consumers continuing to keep their spending belts tightened. No more buying a new lounge suite just because the grandchildren have spilt coke, milk, gravy and paint on the old one, and spewed on it to boot. Get it steam cleaned instead, or just use some good old-fashioned elbow grease.
In terms of investment opportunities, I'm looking at companies with strong balance sheets and manageable debt levels, and which will be around for years to come. Think companies such as Tesco (LSE: TSCO) and Diageo (LSE: DGE).
The Real Trick Now
The real trick now, with the market having soared 40% over the past few months, is finding companies with cheap enough valuations so your portfolio can benefit from any economic recovery, and from a further re-rating of the company itself.
For example, a quality company such as Reckitt Benckiser (LSE: RB), trades on a forward P/E of 16 and a forward dividend yield of not much more than 3%. In the medium term, you'd think there's not a huge amount of scope for any significant share price appreciation.
It's smaller companies now where you will find most opportunities, although even amongst them, value is proving harder to find. Perhaps, if nothing else, that is telling us something about the current state of the stock market.
What did I say about not making predictions…?
More on the economy and the markets:
> If you're in the market for buying and selling shares, consider opening an online broker account with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Find out how you can open an account for free today. There is no obligation to trade.
> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
