DCSIMG

Alan Steel: Best team will win in the end – without knee-jerk reactions

  • by ALAN STEEL
 

Well that’s that – the endless speculation and spending is finally over and we know who the next US president will be.

Except in the end it was all quite predictable. It turns out that the polls again were miles out and it didn’t come down to four old ladies in Ohio after all. Obama walked it, as was confidently predicted over the last year by independent researchers who have studied over one hundred years of election history.

Still it filled the TV news channels for a while, keeping pessimists optimistic about doomsday scenarios. So what’s new to worry about? The so-called “fiscal cliff” anyone?

Last Thursday I was speaking at a Rotary dinner in Fife which to attract a decent audience was entitled What investors can learn from Barcelona FC.

It was built around the premise of putting together a team of fund managers among the best in their field: defence (cautious fund managers); midfield (balanced) and attack (growth). They must be at the same price as average alternatives and you can bring in new stars without transfer fees. Technological developments mean that’s exactly what investors can do to build winning pension and investment plans these days.

It turned out that my timing could have been better, given that less than seven days later Celtic beat the mighty Catalans. Doesn’t change the big picture though – that the best team wins in the long run. And the occasional loss can be the time to obtain better odds on future victories, both in markets and sport.

Anyway, knowing the bulk of the Rotarians were gloomy about prospects for the economy and stock markets, I started with the first paragraph of a speech I’d delivered at a seminar for lawyers and accountants, which went as follows: “The concern which has been shown recently over the state of markets is understandable. For those who have come into equity investment over the last few years it has been quite frightening. A commonly expressed fear is that this is Armageddon – this has never happened before! There is general concern too about the high oil price and an air of barely controlled panic has begun to show, so the purpose of the following notes is merely to put some of the current fears into perspective.”

So when do you think these words were written? Last year? 2008? That’s what the Fifers thought. In fact the speech dated from January 1991, one of the previous times when we worried about recessions and stock market falls that apparently left us with little hope. All caused by a hike in oil prices and a Middle East conflict. Just like the aftermath of an earlier Middle East war in 1973 that saw oil prices rise 67 per cent overnight on 16 October from – wait for it – $3 a barrel to $5. The ensuing panic saw the FTSE Index fall 70 per cent to a low late in 1974.

To illustrate the short term damage to investment values caused by such panics I compared the movement in values of a long running fund, the M&G Recovery. Launched in 1969, the fund is currently managed by Tom Dobell, a member of my “Barcelona“ squad. An investment of £1,000 in the fund in 1972 would have slumped to £540 by late 1974.

Left invested rather than withdrawn in panic, however, it grew to £2,000 in 1978 and by January 1991 was worth £22,229. What is it today? Check this - it would be worth over £157,000. Those brave enough to buy after the falls induced by the panic of late 1974 and who have held on are now sitting on a fund worth over £292,000.

So instead of being driven by emotional knee jerks from one perceived problem to another, why not keep your eyes fixed on the likely investment horizon?

Over in the US, the squabbling politicians will patch up their differences over funding. So look instead to the indisputable facts that the country’ is sitting on oil and gas resources that will change it and the rest of the world for years to come. A US economic boom is the next big thing, with profits and benefits even greater than those in the 1900s and 1930s. Don’t miss it.

l Alan Steel is chairman of Alan Steel Asset Management

 

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