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Investment view

I must be getting old. The gyrations of this stockmarket are making me dizzy. Last week, we saw one of the biggest-ever one-day falls on record. The following day, the market bounced by even more. You could have been forgiven for missing what epitomises the problems facing today&#39s investors. Volatility discourages retail investors. Worse, you might make the wrong interpretation of events. Are you confused? You should be.

Listening to the reaction to Wednesday&#39s sharp sell-off in the London market was illuminating. Brian Winterflood, the eponymous chairman of one of the more successful market-making companies in London, was interviewed on national radio and advised investors to batten down the hatches. I do not blame him for this cautious counsel. I probably would have said the same thing myself, yet the following day the FTSE 100 rebounded by a phenomenal 6.1 per cent. It was as if the sell-off had never taken place and it put me in mind of the turn of the year between 1974 and 1975.

On Thursday last week, the day the bulls were in the ascendancy in London, I was chairing an investment question time panel session in Glasgow. Present on the panel was Invesco Perpetual&#39s Robert Stephens. In light of the previous day&#39s carnage, we reminisced over those difficult times at the end of the 1974 bear market. Then, liquidity was the issue. He referred to the fact that, simply asking a stockbroker to check the price of some shares he wanted to sell, the price was knocked back by a substantial amount. No buyers were then in prospect.

But the lack of liquidity was not one way. At the merchant bank which employed me as a relatively junior fund manager, the expenditure of just £2,000 in December 1974 resulted in the share price of a small engineering company being boosted by more than 50 per cent. There was a lack of trade in both directions. Do not ask why we were buying the shares but the canny executive at my then employer was exploiting the circumstances that prevailed. Those were, indeed, strange times.

There is little liquidity around today, which explains in no small measure why it is that share prices are moving at the speed and the extent that they are. Yet, there is one strange phenomenon that does give me some small cause for concern. It seems that the spread betters are still getting two sale orders for every one purchase. This pattern of stockmarket transactions is broadly borne out by the experience of our own dealing desk. It still seems that there is a shortage of buyers and we need buyers to restore confidence in this market.

At the time of last week&#39s sharp fall, much criticism was heaped on the heads of hedge fund managers. Yet there is evidence to suggest that short selling is not as prevalent as it once was. For a start, the big stock lending institutions are less willing to facilitate this practice. The regulator is known to be concerned over the way in which short selling exaggerates market moves – in both directions.

Short sales have to be covered at some stage, hence buying binges after a fall. Since the institutions able to lend stock to the short sellers are themselves investors in the market, they have probably got the message that they are not necessarily doing themselves any favours.

Rumours abound that some hedge fund managers are going out of business. Certainly, the belief that they are a one way street to riches in a market fraught with danger is being dispelled. Even short sellers make mistakes on occasion and the number of managers who have tried to translate their skills from long-only to market-neutral suggests that some will have got it wrong. It seems there is no hiding place in this market.

This is a bear market that will probably feature in training manuals for years to come. It may not yet have finished. Few would now bank on the 3,000 level for the FTSE 100 index holding inviolate, particularly if there is an upset in the Middle East.

Long-term investors must take the view that it is too late to pile out now. Those with cash burning a hole in their pocket could well consider dribbling some in. For all of us, we are trusting that the future will bring with it a restoration of capitalist values and that the war, when it comes, will be mercifully brief.


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