Monday 22 January 2018

First lesson for investors: returns on your cash are not always cast in bronze

MY mother, God rest her, had a healthy disregard for experts and titles. When she heard that I was toying with a doctorate, she was completely dismissive. "A doctor, a doctor," she exclaimed. "Sure you couldn't cure chilblains," she decided, settling the matter for good.

So I suppose I inherited a lot of that scepticism. While I found it useful in business, it was absolutely essential when it came to investing. I started investing in shares, usually Irish ones, in the 1960s when suddenly buying shares was not just for toffs and those with bank accounts in London and when genuinely keen and (dare I use the word) patriotic people were starting business in this country and turning the tide of emigration.

Then as now, investment was not for wimps. Only, a few people remember a share called Whim Creek Consolidated. I lost money on it but learnt the lesson never to buy on rumour. But the biggest lesson from the 1960s and up to today is never to assume any investment return is cast in bronze. There are just so many examples of the unthinkable happening, which is why constant and determined vigilance is the only guiding principle in investment.

But for the purpose of this column I have no intention of dwelling too much on the catastrophic investment mistakes of the past five years. For a lot of people it's too painful – don't even mention the shares of Bank of America, AIB, Fortis, Unicredit and many others. As for the national economy, I am happy to leave it to those charged with the job.

I must confess that I prefer Lyric FM (Marty Whelan is a tonic) to another dose of gloom and disaffection on Radio One. I admit I'm nearly NAMA-ed out and I am only allowing myself limited doses of the IMF and the European Stability Fund.

However, I do care about our need and ability to climb out of our problems. I do care about the EU project and the euro currency. I do very much care, as those of us who were around in the 1960s did, about the means of stopping emigration. Hopefully, relearning the lessons of business and investment will mean that we can work the miracle again.

The first share I ever bought was in the middle of 1960s and it was in Jefferson Smurfit, a small box maker working out of a factory in Clonskeagh.

Within 10 years, thanks to Michael Smurfit's leadership,the company become a international giant. Regrettably, I sold out (too early) to buy a brand new, light blue VW Beetle. To me the car was class, but the investment decision was terrible. I also bought Roadstone shares long before it merged with Cement Ltd in 1970 and within a decade CRH too, had become a colossal international success.

These days you can still get the eyebrows arching over the lunch table when you tell your younger eating companion that when Tom Roche's Roadstone was first launched on the Irish stock market, such was the lack of interest in the shares that more than three-quarters were not taken up, having to be acquired by the underwriter. The '60s and '70s were something of a golden age for investment in Irish companies. The huge numbers employed by these firms at that time underlined what sort of patriotic endeavour was under way. Great manufacturing companies that were listed then are, just 35 years later, simply distant memories. It offers stark lessons about the nature of commercial life in this country. In 1975, Youghal Carpets, a mainstay of the stock market, had just under 4,000 employees on its books; Waterford Glass employed 6,500; Sunbeam Wolsey in Cork had 2,800; McInerney's, the house builder, was employing 3,100. Jacobs, the biscuit maker that put the figs into fig rolls, was a big employer in Dublin with 2,000 people on its books. Ranks (Ireland) the flour millers, had about 1,500 staff. But by 1975, the country was seeing the end of the first investment bubble that I encountered in my patchy career. This was the so-called 'shell' company boom. Enterprising individuals snapped up small, quoted companies and, with some skill, inserted high-earning businesses into these 'shells'. The market then responded to these high-growth companies by pushing their share prices through the roof.

There was, however, a limit to this manoeuvre. Sooner or later, the 'shell' was going to have to be backed by real assets. Many of the 'shell' companies did indeed complete this stage of the process. However, they then had to face the the challenge of the quadrupling in the international price of oil. The lesson I learned from this period was that investment, like many other things, has a fashion. And as every teenager knows, it is better to be under the duvet than out of fashion. But fashion seldom, if ever, lasts. The second lesson is that even though the first oil shock (1973) was a unique event, there is always something straight out of left field waiting to ambush the unwary. In recent times, who anticipated banking and euro crises, sovereign debt, and its knock-on effect on shares, bonds; pension funds; and of course, people?

So the valuable lesson I discovered in some painful investment ventures was that while marching with the crowd is reassuring at times, it is no long-term strategy. Be on the look-out for the unexpected. If you obey the rules you have a better chance of success. Over the coming weeks, I'll be looking at shares that I believe will keep the small investor alert and on his or her toes.

Dr John Lynch is a former chairman of CIE

Irish Independent

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