MARCHING ON, BUT PAUSING FOR BREATH

Despite overwhelming evidence from past centuries showing economic progress moves cyclically, and not in a straight line, experts and investors become nervous, sometimes suicidal, when things don't look perfect.

The more you think about it, the more you realise cycles are natural, and go back to the beginning of time. One of the most obvious ones is that night follows day and vice versa. And as I've said before there are four Seasons, unless you live in Scotland when there's only two - Winter and next Winter.

In Linlithgow we have our own cycle, which still causes confusion to people who aren't born here or haven't lived here for a while. It's called the "Riding of the Marches". So what's so confusing about it?

Well it's when it takes place - the first Tuesday, after the second Thursday in June - and although it's been like that for well over 600 years, it still takes everybody else by surprise - including our clients because we're closed on a Tuesday.

Some cycles take so long to complete they are not noticed by folks other than specialists in their fields. Last week I received an email - the words of Professor Ian Plimer from the University of Adelaide, covering the effect of solar and cosmic activity in what he calls "the well recognised 800 year global heating and cooling cycle that keeps happening, despite our totally insignificant efforts to effect climate change".

He reckoned last year's volcanic eruption in Iceland, in only four days, negated every single effort made by everybody in the World over the last five years to control carbon dioxide emissions on the Planet. Actually he calculates the Planet has cooled over the last 100 years.

You may not have heard of a statistical study which looked at returns from Cash, Gilts, Equities and Inflation Rates prepared by Barclays de Zoete Wedd. Today it's known as the Barclays Equity Gilt Study.

In the previous format the returns, before and after tax, are shown since 1919, and comment was added for each year, in terms of what political and economic circumstances were - what was going right, but more often than not, what was going wrong.

It's worthwhile looking at this study - produced annually - although these days it only goes back to 1945. But as you read the commentary of what was going on each year it was an encyclopaedia of bad news. You'd be forgiven for thinking, as you read each synopsis, that thank goodness you had been in Deposit all these years, thus avoiding financial ruin.

But over all these years what stands out as clear as day is the only investment that continually beat inflation in the UK, was the stockmarket. And that's only in terms of the Footsie. I reckon the Footsie is an asylum run by inmates, and I'm not alone.

World renowned analyst, Rob Arnott, reminds us that any stockmarket index dominated by the largest capitalised companies - the Footsie or in the US the S&P 500 - will underperform any other index comprising any financial or non financial grading system other than sheer size, or capital value.

Arnott calculated if Regulators stopped insisting pension fund trustees match the constituents of these skewed indices, it wouldn't be too many years before all pension deficits were erased. The current Index system is so flawed.

And yet we constantly hear investors should stick to Index Trackers, because they're cheap and most fund managers can't beat the Index. What utter tosh. Index Trackers will only work in cycles where debt and deficits are low and demographics are positive (in developed countries).

Today's Greek/Euro crisis has developed into the typical mindless panic when we are advised the only possibility is Armageddon. In terms of the Dow Jones Index it's led to a fall since the end of April of 6.8%. Ned Davis Research who study economic factors, including Crisis Events, confirms that average initial fall of all 50 major crises since 1905 - such as the outbreak of War - is 6.8%.

But what is encouraging is nine months later - when commonsense returns - the average DJ Index gain is 14%, and the median gain is 16.9%.

Last Friday I had lunch with an outstanding European Equity Manager, Richard Pease, who says the only sure way to make money over the long term is to buy world class companies at fair prices and to be patient. And that's the system that works best at this point in the cycle. Greece? Didn't bother him in the slightest!

At times like this the best way to make solid gains is have your investments managed by the best stock pickers, defensive and adventurous. But above all ignore the miseries. Meanwhile, we're sticking to the Woodfords and Tullochs of this World who think like Richard.

Alan

Alan Steel
Chairman

For and on behalf of Alan Steel Asset Management

Authorised and regulated by the Financial Services Authority

Award Winning Investment Advisers

This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

Alansteel
Author
Alan Steel
Chairman
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.