And time and again, surveys have shown that active trading does not significantly enhance returns. Indeed, after fees and dealing costs, the active trader can end up with a worse performance than simply standing still.
So, many investors stick by “buy and hold” on total return and moral virtue grounds. Once they have chosen solid-looking big companies with sound growth prospects and a long track record of dividend growth, why disturb it? But then, very so often, along comes a shocker. And shockers do not come much bigger than Tesco.
Shares in the food retailing giant slumped 6.6p on Friday to an 11-year low of 229.5p on a profit warning and hefty dividend cut. The group’s troubles are no surprise – for more than 18 months there have been clear signs it had run into heavy weather and that this great high street store engine had stalled. Even so, many buy-and-hold investors were prepared to hang on, comforted by the prop of a 4 per cent plus dividend yield. And Tesco would never cut the dividend – would it?
Well, now it has, chopping the interim payout by 75 per cent. The full scale of the group’s problems have been laid bare. The 4.8 per cent dividend yield was the main attraction when I wrote about the company here in March. Now this has gone and new chief executive Dave Lewis, who takes up the reins today, may not be able to protect the final payout.
Tesco’s problems have long been evident – the competitive threat from discount retailers such as Aldi and Lidl, the need for a store refurbishment programme, and the group’s management issues. Obvious too were the problems in the US.
Now trading profits are set to fall from £3.3 billion to £2.4bn this year. But the dividend cut suggests significantly bigger problems than a short-term trading hiccup.
Tesco may now launch a full-scale price war against its rivals – shares in Sainsbury’s and Morrisons were hit last week on just such a prospect. But the greater challenge may lie in what appears to be a more permanent change in shopping habits. The traditional big weekly shop at the edge-of-town store is giving way to a preference for shorter visits to convenience stores, an opportunistic pursuit of lower prices and the relentless quest of consumers for novelty and change.
Even so, many investors will be reluctant to sell now, after such a sharp fall in the share price. And some may be viewing Tesco as a bargain buy: surely all the bad news is discounted and the shares, down 37 per cent this year to the lowest since 2003, cannot fall much further?
But catching a falling knife is a dangerous game. The group may be on course for earnings per share down from 24p to 15p, which would put the shares at 231p on more than 15 times such earnings, which is hardly cheap. “Even at 2003 prices”, the Financial Times Lex column concluded, “Tesco is no bargain”. The group’s trading problems are not going to be solved in a trice. This is set to be a long haul.
Sum lets pupils add up
When a recent Money Advice Service report revealed that one in six people under 35 believed the base rate of interest to be more than 10 per cent and that more than 40 per cent did not understand that inflation erodes the purchasing ability of money, the need for financial education in schools is unarguable.
So I was delighted to see that the Chartered Institute for Securities & Investment (CISI) Educational Trust has awarded its largest grant of £45,000 as part of a three-year sponsorship to the Stewart Ivory Financial Educational Programme.
This provides financial education to school leavers throughout Scotland – in the last academic year their financial education officers visited 223 schools and spoke to around 15,000 students, in more than 800 sessions.
In addition to the three-year cash award from the CISI Educational Trust. CISI is also donating copies of its Your Money book to 15,000 Scots students annually.
Hamish Buchan, chairman of the Stewart Ivory Financial Education Programme, said: “The financial issues facing young people continue to be highly challenging. Therefore, the need to raise the financial awareness of young people to enable them to deal with these issues with more competence and confidence, especially at this critical stage in their lives, remains as great as ever.” Well done, CISI.