The answer’s easy – when future returns are going to be fantastic. The only problem is, how do you know when future returns are going to be fantastic? I mean, was it possible to know that in 1985 we were going to have an amazing, almost seven-fold run up over the next 15 years? Or that, in 1999, we were going to go precisely nowhere for more than a decade?
Let’s start by looking at what the market is.
As I’m sure you already know, the FTSE 100’s price level represents the market value of the largest 100 companies on the London Stock Exchange.
So let’s break that down into two bits. One bit is the 100 companies; the other bit is the market value.
The 100 companies are things like Vodafone, HSBC and BT, some of which are vast, multi-billion pound operations which span the globe and employ tens, if not hundreds of thousands of people. Most of them have existed for decades, and some of them have existed for centuries. So keep that in your mind – 100 vast companies, multi-billion pound profits, operations all over the globe, and decades of operating history.
The other side of the market is the price. This is the thing that we see whizzing up and down on computer screens, or failing that, we see it being announced on the news every evening. If it goes up or down a lot in a short period, everybody starts getting excited and we might see pictures of traders shouting into a telephone.
The next question is – what is the relationship between these two things, these 100 companies and this FTSE 100 number we see bobbing up and down?
The answer is, not very much actually. There is not a particularly hard link between what the 100 companies are doing out there in the world, how much profit they’re making, how much they’re growing and how much they’re returning to shareholders as dividends, and that market price.
That isn’t to say there’s no relation at all. That’s why we haven’t seen the FTSE 100 fall to 1,000 in this bear market, and it didn’t go to 100,000 in the last bull market. So the FTSE 100 isn’t on a drunken, or random, walk with no restrictions. It’s more like a drunk, staggering down the road towards a pub a mile or so in the…
