My desk neighbour at work is a very nice chap. He's in his early 30's, married, owns his own home in Brixton and is father to a little boy. By his own admission, he knows absolutely nothing about the stock market or investments. In short, he's about the last person in the world who should be opening a stockbroking account.
So, I was a little surprised earlier this week when he said he was thinking about borrowing some money (by extending his mortgage) to buy some shares. "The stock market's at around 6600 now, right? It's been up to 7000 before now, so there must easily be some money to be made!"
I tried to steer him away from this idea, explaining as gently as possible that the idea with stock market investing is to buy when shares are cheap, not when prices have been rising quickly (albeit erratically) for the last 3 years. I hope successfully, although a rather worrying copy of the IC had appeared on his desk by Friday lunchtime.
Perhaps the entry of inexperience/inappropriate individuals into the market doesn't represent the absolute top, but it surely suggests we're nearly there. I have been in a couple of taxis recently and none of the drivers have offered me stock tips....but maybe give it another couple of months?
I am certainly not going to offer my view on where the market is headed in the next 12 months. At 14x prospective earnings for the median stock it's certainly not expensive, but it's not cheap either. I would though hazard against judging the return of the hobby private investor to stocks as an indication that the market has topped.
It's worth remembering that the public has been heavily overweight bonds and cash for a very long time and may only just have started to think about equities again - the 'great rotation out of bonds' may still occur. In the 1980s and 1990s of course, every man and his dog was talking equities and did so for a very long time at valuations which reached over double the current market valuation.
We've been through 2 terrible bear markets and a generation has grown to view the stock market with great suspicion. This has though been a mistake. While the headline FTSE 100 average hasn't yet broken to higher ground than it reached in 2000, there have been segments of the market that have done wonderfully in this period.
It's a pretty well known fact that people in general are worse market timers than they are stock selectors. But people for some reason make very binary decisions about being either in stocks or out of stocks. I remember one of our members Tournesol in April 2010 showed great short term timing going heavily into cash. He was right for the next couple of months as the FTSE collapsed about 15% on Europe worries. But the FTSE 100 is now something like 18% higher than when he sold and 37% higher than where it bottomed the next month. It's very very hard to get in and out of the market at the right time.
The fact remains that the stock market in the medium term plays out just like Keynes' Beauty Contest, with most market participants trying to figure out where everyone else thinks the market should be. It's very very hard to know where the equilibrium is. So it's a very very tricky thing to decide to sell out completely - especially when valuations aren't massively extreme.
A bit of a Sunday ramble... but I hope my own thoughts can add something to this debate.
