OpinionNov 11 2013

Why are investors staying low while the FTSE is high?

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In the noise surrounding one particular UK Equity Income manager’s departure – debates about whether to stay invested or to sell out – coupled with a flurry of company results and economic data, has led to one significant detail being completely overlooked.

The FTSE is once again teetering at a new high – reaching 6,750 as at the middle of last week, just 90 points off the previous high recorded in May this year. The question is, what is behind it?

Mr Merricks, based on comments made by Neptune US Opportunities fund manager Felix Wintle, controversially claims that this equity bull run is “fad-less” – it simply has no fashion, trend or hype surrounding it.

Analysing previous investor surges into equities, Mr Merricks highlights a trend of trends. For example, the FTSE’s high at the turn of the millennium was a result of investors’ rush for fandangled “tech” stocks and resulted in the loss of billions of pounds when the bubble burst.

More recently, FTSE highs included the build up of ‘loose credit’ and the belief that bricks and mortar could never lose value.

This equity bull run is “fad-less”. Jenny Lowe

The old adage springs to mind: what goes up must, inevitably, come down. Investors blatantly forgot this piece of wisdom in previous rallies. But could it be that, this time around, investors have learned their lesson and are quietly questioning the underlying force behind the FTSE’s upward trajectory?

Mr Merricks naturally questions whether investors are aware of something that he is not. “Where are the investors beating down our door, frantic to get a piece of the action? They’re noticeably absent,” his note states.

Instead of rushing into a rising equity marketplace, investors this time around appear to be avoiding the herding instinct, which is powered by behavioural biases such as fear and greed (read more in our Guide to Behavioural Investing on page 36).

In my (humble) opinion, it could be a case of ‘paranoid android’ on the behalf of investors. The quick succession of boom and bust scenarios has simply left them with too much knowledge and a ‘wait and see’ attitude to the stockmarket.

Too many have had their fingers burned to really believe that this time is different and, ironically, that will have cost them dearly.

My advice – go back to basics. Buy low, sell high.

Jenny Lowe is features editor at Investment Adviser. Editor John Kenchington is away.