QUALIPORT
It's Never Too Late To Buy

By Maynard Paton (TMFMayn)
March 24, 2003

"These eight weeks [during early 1975, when the FT 30 doubled] amount to the most astonishing single period in the post-war history of the stock market, although few investors would admit to having enjoyed this frenzied feast while it was happening. Many simply looked on, paralysed like rabbits caught in the headlights. Many suffered intense frustration. Far too many institutions had husbanded their cash resources for sunnier days, complacently believing that the time would come when wonderful buying opportunities would be there for the taking at their leisure.

In the event, these wonderful opportunities vanished like melting snow in a sudden thaw and, to quote Rowe & Pitman's Market Report, 'most investors were wrong-footed by the sudden change and remained imprisoned by the seemingly irrefutable logic of their gloom'... Perhaps the greatest psychological damage was inflicted on private investors. Many had sold out on the way down [in 1973 and 1974]; others who sat through the recovery were now disillusioned beyond repair and never wished to own a share again."

So recounted John Littlewood in his exceptional book The Stock Market: Fifty Years Of Capitalism At Work on the surge that ended the 1973/4 bear market.

Present day

From a 3,287 low recorded on March 12th, the FTSE 100 closed on Friday at 3,861 to register a 17% gain over seven trading days. Hardly comparable to the vertical take-off witnessed 28 years ago, but still a strong enough rally to prompt some people to consider: 'Is this the beginning of the end for the current bear market?'

Well, who knows if the FTSE 100 is past the bottom? What counts -- as it always has done for investors of individual shares -- is buying the right company at the right price. Assuming you've got a focused approach on these two critical matters, there's less likelihood of being 'paralysed like a rabbit caught in the headlights' as and when share prices move sharply.

Even so, the market can play mind games with even the most resolute of stock pickers. Combined with last week's short, sharp rally, Littlewood's recap of the 1975 recovery goes some way to highlight two psychological errors investors can make in a bear market.

* Complacency: Littlewood recollected much complacency during early 1975. These days, there are undoubtedly investors around that have predicted the market falling for some time. However, unless the end of capitalism is nigh, shares will -- at some point -- rebound and enter a new bull phase. If market pessimists don't adopt a realistic and flexible attitude, there is a significant chance they, like their 1975 counterparts, will remain 'imprisoned by the seemingly irrefutable logic of their gloom'.

* Regret: Does this sound familiar? You buy a share at 100p, only to see it slide to 70p over a couple of months/years. With the company fundamentals remaining intact, you consider buying more at the cheaper, better value price, only to defer the purchase because of various market/political/economic fears that have since arisen. Then, bargain hunters step in and the shares quickly recover to 85p, yet you sit tight because of your regret of not topping up at the lower price. Instead, you want the shares to fall back to 70p so you too can buy at that bargain basement price. But the market doesn't care, and soon returns the shares to 100p.

Assuming the inherent long-term prospects for the company remain unchanged, lower buy prices mean greater investment returns. In our example, even at the post-rebound 85p, the shares should still have been worth buying. Yet as so often occurs, investors focus on recent market movements and overlook the value still on offer, much to their subsequent lament.

What now

Sooner or later, this bear market will finish. If the 1973/4 downturn is anything to go by, it will conclude with a sudden surge. As the last week or two have demonstrated, market rallies arrive unexpectedly and can move extremely quickly. Now is not the time to become a complacent bear.

Past history and experience shows buying the right company at the right price provides consistent rewards. Unfortunately though, you'll rarely get in at any share price bottom. However, you'll almost certainly fare better than the investor who postpones any investment due to fear, only to panic buy when a share price recovery is fully evident. And whatever you do, don't harbour regrets of missing the recent upturn. Even after the bounce, there are still many decent businesses sporting attractive valuations around. They may not be as cheap as they were the other week, but they're still cheap. For the moment at least, it seems it's never too late to buy.