I have not been too well lately. No, this is not an attempt at excusing myself for not having predicted the likely outcome for markets during 2003 sufficiently accurately. As those of you who have followed my musings on markets in the past will know, I am not big into forecasts. To put it bluntly, committing to paper where you consider a share or an index might end up in a few weeks or months' time is a mug's game. There are plenty of uncertainties in this life and more than a few of them reside in the investment world.
But to return to my health, no doubt you are anxious to learn what has been the problem and how I am getting on. Don't ask. It is sufficient to know that I have had more time to reflect on life, the nature of the universe and what investors should be doing than is usual for this time of year. And that is the main reason for even mentioning that I have been less than 100 per cent recently. My observations are tinged with a little more introspection than is usual for a hard-bitten professional like me.
Take the round of forecasts made by those less circumspect than I in looking forward. This year, by all accounts, should be a golden year. True, there are those who consider that we have travelled too far and too fast as the old year drew to a close but the reality is that a positive result for 2003 has encouraged those prepared to quantify how this year might turn out to be upbeat in their predictions.
This is momentum investing writ large. The market will continue to progress in the direction it is presently travelling, according to the majority of forecasters. Not very scientific, but understandable.
Then again, should we really put so much store by how an index behaves? Indices, after all, can be very misleading. The FTSE 100, for example, is dominated by a small number of very large companies. And how many investors appreciate that these much-quoted benchmarks are a relatively recent phenomenon – at least, so far as the influence they wield they are?
When first I set foot in the City of London, the headline index was the FT Industrial Ordinary – just 30 shares that were meant to encapsulate the power of industrial Britain. Moreover, that particular index was published once a day only.
The big changes that have taken place in the four decades plus since I started out have been made possible by technology. It is technology that allows indices to be calculated in real time. Technology has enabled new investment instruments to be developed which facilitate trading in whole baskets of stocks – complete indices even. And technology delivers information and trading updates direct to your desk – instantaneously.
But all these sophisticated techniques and instant information obscure the real purpose behind investing. The stockmarket is indeed a market of stocks. The index is no more than a reflection of what a number of businesses are doing in aggregate – in price performance terms, that is. The bigger the business, the more influence it will have. Make no mistake, though, the headline numbers will conceal a variety of disparate share price moves. In the end, it is picking the right stocks that count.
If the index counts at all, it is as a measure to determine how successful your stockpicking prowess has been. This is a point that has not been lost on a number of fund management groups as they develop focus funds or promote star managers, capable – it seems – of superior stock selection. Yet the reality is that index tracking is growing in popularity, not least because of the costs involved.
In the 1960s, picking the right stocks was all that counted. Today, partly as a direct result of the long bear market of the 21st Century but also because of the recognition that most of us have some exposure to the stockmarket in one form or another, it is managing risk that takes centre stage.
Risk is often defined as relating to performance against a benchmark – the most common of which are indices. This may not be the whole story but it certainly counts. Do not count this as a forecast but stockpicking is coming back into its own. I view this as a positive development, just as I hope that 2004 will also see me return to more robust good health.