August 2007
 

For 'volatility' read 'opportunity'

by Arthur Childs, Chartered Financial Planner

My wife and I moved the excess that had built up in our deposit account into a multi manager fund this morning. Was this because I had some inside knowledge of the markets, and in particular an end to their current volatility? Yes and no. 'No' because anyone who claims to know which way markets are headed in the short term should probably be detained under the Mental Health Act. Warren E Buffet, probably the most successful investor of all time said the following:

“I have no idea what business is going to do next month or next year.  I don't think it's important whether you're confident about tomorrow or next week. 

Confidence comes from taking a long-term view of the investment market and the economy.  If the economy does well over a long period, markets will do well over a long period.  In the short run, the market’s a voting machine and sometimes people vote very unintelligently.  In the long run, it's a weighing machine and the weight of business and how it does is what affects values over time.” 

'Yes' because I know one thing for certain - the stocks into which the fund is investing represent better value than they did when the FTSE 100 peaked at 6726 in July. In early 2003 in the depths of the bear market, Jason Zweig, a senior writer at the Money magazine in the US, and formerly a senior editor at Forbes, wrote

"Take heart: The death of the bull market is not the bad news everyone believes it to be. Thanks to the decline in stock prices, now is a considerably safer - and saner - time to be building wealth."

How right he was. We did not know it then, but we were at the start of a new bull market that has so far lasted for over four years.

To me, volatility in markets is very much like a farmer's ploughed field. If seeds are dropped in the field now, a lot more of them have a chance to produce a great crop than if they were just to be scattered on top of a field that has a nice smooth surface.

One of the best known fund managers who I had the pleasure of meeting a few months ago, Jupiter's Tony Nutt, has recently been interviewed by Lindsay Vincent in the September 2007 issue of Money Observer. Lindsay writes:

“Nutt refuses to be fazed by the turmoil in debt markets. 'Markets are nervous about the problem spreading beyond the sub-prime mortgage market and it is too early to say it amounts to more than that. If you are going to argue this is a prelude to the US moving into recession, it is a different scenario to the one I'm expecting. I expect little more than a slowdown and have argued for some time that we will see single-figure returns this year from the market. I'm not being blasé, but you can fear fear itself."  

One more quote and then I will leave you to your day, but hopefully less fearful and at least mulling over the possibility of moving a little money into a well managed investment fund or two . The final quote is from The Intelligent Investor by Benjamin Graham (1894-1976), the book that Warren Buffet decribes as "by far the best book about investing ever written":

“The primary cause of failure [for individual investors] is that they pay too much attention to what the stock market is doing currently. 

The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings, is perversely transforming his basic advantage into a basic disadvantage.  That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons mistakes of judgment.”

Have a great day.

Please note that this information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.  If you are in any doubt as to whether an investment is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser such as ourselves. If you would like to discuss a new investment at this time please ask your usual Arch adviser, telephone 0845 3700 661 or email enquiries@arch-fp.co.uk.

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