In fewer than nine months, I will reach my 40th anniversary of giving people help as an independent financial adviser.
So, as we apparently face another financial Armageddon, this time thanks to an unstable eurozone, with the dreaded Drachma playing hide and seek for two years now, what key lessons can I pass on to confused readers?
I started off in the early months of 1973, when we were told everything in the UK’s investment garden was rosy.
Easy – you just bought shares in almost anything and couldn’t go wrong. So simple it was to invest, the rumour went, even a monkey with a set of darts and a copy of the Financial Times could beat any index you threw at it. Come October, however, the world caved in.
By January 1975, the FTSE index lost 70 per cent of its value and the monkey had its darts confiscated.
They say the darkest hour is just before the dawn and January 1975 proved no exception.
In the space of weeks, shares bounced by over 25 per cent and, over 12 months, the index doubled. Why there was such a sudden turnaround, given the mess the UK economy was said to be in, it’s hard to say.
However, over the last 39 years the pattern has been repeated.
It happened in the 1980s at least twice, in 1984 and, more famously, in 1987’s October crash.
I remember that well. Apart from anything else I had the misfortune of being on an Iberia jet trying to land in what seemed a hurricane at London’s Heathrow on the Sunday night before Black Monday. It was a day when thousands lost their life savings and Sevenoaks in Kent should have been renamed Oneoak.
Prior to this crash, investors were borrowing to buy more shares, in the way that, in the mid 2000s they borrowed vast chunks to stick into the latest one-way bet – property. Aye right. When had I heard that before?
There have been plenty of other alarming times since, such as the 1997-8 Asian contagion.
That also infected China, then Russia and, just to make a world tour of it, went onto infect Brazil and Argentina before nibbling away at Mexico for good measure. Nobody saw it coming.
Don’t be mistaken, it was serious. In various Asian countries, growth vanished and currencies fell 50 per cent inside two months, Russia was bankrupt as was Latin America. But then what happened? The Armageddon never unfolded. The infected countries all recovered miraculously, as did their stock markets.
Once again, it proved to be the case that euphoria is more dangerous for investors than deep fear.
Exactly five years ago, I was at Claridges in London for the official launch of New Star’s International Property Fund, launched, we were told, thanks to unprecedented demand from private investors for such an investment opportunity.
I asked the presenter when exactly, in his experience, did the majority call it right and didn’t he think this was a high-risk investment as a consequence? Don’t be silly laddie, was his response. Some £700 million poured in. Those investors have not been able for years to get out and the fund is worth £300m today.
Don’t get me wrong. I’ve made mistakes, too. I got sucked in personally to the dotcom boom. Sitting on big juicy profits on four stocks, one up eight-fold in a year – I thought I’d hold on until the new fiscal year in April 2000 to save tax.
Then in March 2000 the crash happened. Guess how much value these four stocks lost? Not far off 95 per cent.
But my message is this: The most dangerous investments are the ones that look the safest bets.
Nobody thought of buying gilts 20 or even 30 years ago when they represented – in hindsight – the best bargains.
Income yields were fixed at anything up to 15 per cent guaranteed. Now at 3 per cent before tax and inflation, folks can’t get enough of them.
And when the world fixes itself – faster than you expect – and interest rates rise, guess what’s going to happen to the latest safe-as-houses home for your money? Time for a sharp exit.
• Alan Steel is the chairman of Alan Steel Asset Management
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