This windscreen is the prescription for future success

Published on Friday 15 August 2008 20:23

BILLY Connolly once told a wonderful story about prescription windscreens. Like many of us as we get older, his Dad bumbled along with various pairs of glasses for different activities, but couldn't lay his hand on any one pair when he needed them. Billy suggested he should get a prescription windscreen which would mean he wouldn't require his driving glasses.

Now, in theory, this is a great idea but, as Billy pointed out, other drivers would get the fright of their lives when they saw, saw, coming

towards them, what appeared to be two massive eyes magnified in his windscreen.

And that's how problems get out of proportion. We get easily frightened and become unsure as how to deal with them. This of course creates panic and nowhere is this truer than in financial markets. After the last few months most folks are scared of their own shadows, and few seem prepared to stick to long-term convictions. Instead, every piece of data, research and gossip is put behind the media equivalent of a prescription windscreen. The result is a two-headed monster set to destroy our finances on an unprecedented scale.

Now it's fair to say we are in an uncertain financial climate and there are some significant issues to be dealt with. But what's new? This situation pops up once every five years or so and at least once a decade. We're putting far too much weight on news that breaks daily without taking time for perspective, concentrating on the long term. That's what the best fund managers do. They buy undervalued shares unwanted by the majority, keep them for three to five years, if not longer, and sell them when everybody wants them.

Now and again stockmarkets get dislocated from reality. Between October 1973 and January 1975, the UK stockmarket fell almost 70 per cent. In January 1975, when the future looked at its bleakest, it jumped 25 per cent. Over the course of the next year, it rose over 100 per cent. Why?

What appeared to have happened was the UK government persuaded UK insurance companies to put some cash into shares, creating demand. Once one insurance company stuck in funds, the rest followed, and the rest is history.

The problem today is insurance companies don't have much liquidity, certainly not to the same extent as 30 years ago. So, is there anybody out there with surplus cash buying, or about to buy, undervalued equities?

An experienced fund manager visiting us recently confirmed that the new kids on the block with serous deposits available for investment are the sovereign wealth funds, which represent Middle East countries awash with cash built up thanks to the oil sales bonanza, or those further afield in China.

The manager told us he had just done a deal with a small Middle East oil producing country wishing to invest $500 million in shares. And he'd an agreement with another sovereign wealth fund investing a further $400 million. They are not investing in shares for the hell of it. They recognise high oil prices aren't going to last much longer and that it makes sense to diversify. They've also learned over the years that it makes sense to buy assets few others want. Perhaps they've been watching Warren Buffett for too long noticing he seldom trips over private investors as he buys.

So, as private investors are still running for cover, chucking millions into funds they perceive as safe, serious wealth is snapping up stockmarket bargains, including bank shares that have risen 50 per cent over the last few weeks. So, let's take the economic slowdown for what it is. Let's deal with it and move on. Smart money overseas eyeing UK and other international stockmarkets, investing huge amounts, is a clear indication of the great value right now. They're not short-sighted – that's for sure.

&#149 Alan Steel is chairman of Alan Steel Asset Management in Linlithgow