Short Term Fallers
Last week I attended the Cheltenham Festival as a guest of one of the country's leading investment companies. This is the fourth year I have been and it is an occasion that I always look forward to.
The day had the usual format of lunch, followed by the annual redistribution of wealth from me to the bookmakers. This year, more than I can remember in the past, I noticed that a number of the guests were anxiously monitoring their Blackberrys. For those of you not au fait with the latest gadgets/fads, this hellish device ensures that anywhere in the world the user is able to access their email, as well as the internet. It has a keyboard that seems to have been designed for Tom Thumb rather than a fully grown human and I am certain will create a new medical condition called Blackberry finger in the next year or two.
Anyway, in between bookie donations I had a chat with one of these poor afflicted souls to find out what was causing him such consternation. He gave me an incredulous look, and with his fingers jabbering away at the tiny keyboard, stated "Don't you know what happened in the Far East overnight?" When I replied "No" he informed me that Japan was down 3% and London had been jittery in the morning. His office was keeping him updated with market movements in anticipation of New York opening. Quickly realising I was unlikely to get a hot tip for the Champion Hurdle from this "Merchant Banker" I made my excuses and headed for the Guinness tent.
Whilst sipping on a nice cold one and watching the revellers below, I reflected on the poor chap I had just spoken to. He, it appeared to me, was a victim of the modern affliction of short-termism. Fluctuations have always occurred in the stockmarket. One of our favourite charts in the office is a graph that shows the returns achieved by cash, gilts and equities since the Second World War. The first two lines representing cash and gilts are relatively smooth, although only the gilt line manages to beat inflation. The equity line, although looking like the profile of the Alps, is considerably higher. Indeed the returns that equities have achieved since the War is 22 times greater than gilts and 53 times more than cash.
Were there times that the stockmarket fell during this period? - Of course there were, and many far worse than a 3% overnight fall. Did these have a huge impact on a long term investor? - Err… No.
So why was there such a concern over a short term blip?
It is ironic given I was at Cheltenham, but my guess is that the lines between investing and gambling are getting more and more blurred. The dictionary defines an investor as someone who commits capital to achieve potentially profitable returns, usually over the longer term. A gambler is someone who commits money into an uncertain outcome. Getting regular updates, on a half hourly basis, as to the level of the FTSE 100 index to my mind is irrelevant if you are looking for a return over five plus years. Indeed, it seems to have more in common with a betting shop punter. However, if you are managing a hedge fund or have borrowed money to gamble on the level of the market in a month's time (don't laugh - it happens) overnight falls will undoubtedly cause palpitations!