Sometimes I think the entire point of the Economics section of the Guardian newspaper is to provide Tim Worstall with source material to ridicule. After all, all the readers have their money in ethical investment policies with the Co-operative, so why even bother with share data, right? That’s probably why today their website was showing this as the lead story in the Money section:
Now, I don’t want to sound like I have a massively detailed grasp of the workings of the stock market, I consider it a form of informed gambling. No, it’s not
that difficult, never invest what you can’t afford to lose, blah, blah, the value of opinion in the Guardian can go down as well as be just plain awful, etc. But well, “
the FTSE 100 is back at its highest level since May 2002. So is it time for investors to re-enter the market?” What’s the idea behind this plan? Buy high, sell low?
You’ve never heard of irrational exuberance then? It’s way too high so let’s buy and see how much higher we can push it on dubious valuations and dot com speculation. That’s how stock markets work.
All that naked blogging must have damaged the three brain cells storing your economic knowledge
Armin, yes, bless Mr Greenspan. But that’s rather the point I’m trying to make - for a moderately cautious investor, the day that the FTSE hits a new high isn’t necessarily the tme to join the rush to buy. Last Thursday afternoon was the time to buy, now is the time for a bit of profit-taking….
Economic Idiot Award III
It’s some time since we had an award of
all personal finance editors believe that “is now the time to buy?” is the big question that all people interested in reading about the stock market want to have answered at any given time.
The FTSE100 being at a 3-year high is the “tag” to tie the article to. The connection between the two is entirely spurious. The same editor/headline writer would, at another time, be writing “The FSTE is at a 3 year low; is now the time to buy?” or indeed “BP Chairman has cheese sandwich for lunch; is now the time to buy?”
Paddy: I’m aware it’s just a tagline to a story consisting of quotes and some intelligence-insulting explanations- But even I (a sceintist not an economist) would have gone for a “Despite the FTSE 100 being at its highest level since May 2002, we examine some sectors which are still undervalued” story. And it’s the fact that they could get away with that tagline at all, with its implication that “well, you’ve been avoiding stocks, but now the market’s at a 3-year high, buy, buy, buy!”. It’s, well it’s revealing about the people who write these things isn’t it?
Well, remember the dotcom bubble? I think it pretty much went from 3 year high to 3 year high for a quite long time. Some people still made a lot of money even when they joined at the 15th 3 year high. Simple reason being that as long as everyone is joining because they think it will continue to go up, well, it will go up. The secret is to leave at the right point.
Apart from that, you can interpret the tagline in many ways. The way you did. Or differently, for example as ‘the optimism is back’. I’ve only scanned the report, but I think that’s what they were saying there. That now all the signs are there that it will go further up.
Not to forget that most of what’s going on in the stock markets is not about economics. It’s about behaviours and a lot of irrational expectations. No logic in there.
Armin: point taken. I remember the dot-com (and I might add on a more personally painful note, biotech) bubble - I’m sure you do too (you do get Intel stock as part of your renumeration package, I take it). Bearing the dot-com bubble in mind, can I point you to this quote from the text:
“One of the first principles of investing is to gain diversification across companies and sectors. This reduces the risk taken to achieve the same return.”
So, if, in the late nineties rather than sticking everything in high-tech and telecoms I’d spread my risk by investing in a wider range as well - mining and minerals and defence manufacturers (say), I’d have “achieved the same return”? He can write this and expect me to take his advice?
The “story” itself is mostly quotes from people working in various areas of finance “advising” that they’re optomistic about growth in their particular area. If the tagliine wasn’t on the main page and made me think “wait a minute”, I wouldn'’t even have skim-read it.
As an economist of the empirical rather than dogmatic type, I’ve just done a little study of the performance of the Guardian’s implicit system.
Using FT Allshare data since 1975, I find that if you had entered the market on every 3-year high and left it (investing the money at 1-month LIBOR) on every three year low, you would have realised an annualised return of 8.5% versus 7.9% for the index itself. You would also have had lower volatility. I suspect that the FTSE would not be that much different. So it seems to me that buying 3-year highs is not obviously wrong.
dsquared: Interesting - and go and tell Tim - If Simon Hildrey had presented data like that in the article rather than what reads like random waffle, I’d have been significantly more impressed.
dsquared - By the way, does your data mean that you leave the market at every three year low and then - as the Guardian’s header implies wait three years for the next high before “re-entering” the market?
In the cacked up excel spreadsheet I used, yes. I also suspect that the series I downloaded doesn’t include dividends, which would also make a big difference. There is reasonable evidence for momentum effects though in the econometric literature.
Investing on credit and Sods Law
Yesterday the FTSE 100 Index closed at 5,731 which represents a gain of around 70% over the last 3 years and virtually its highest point for five years.
Last time we had such a stock market boom was during the technology bubble when thousands of inv…