Stockmarket rallies are said to climb a “Wall of Worry” as the stockmarket climbs higher in spite of the various problems that already exist or may be about to happen.  There will always be many Cassandras and Perma-Bears out there highlighting the many reasons why the stockmarket is too high and is riding for a fall.  The vast majority of the time they are wrong but they have their day in the sun when the market does indeed fall (often after having risen substantially since the bears originally started shouting about their worries).

The reality is that stockmarkets broadly follow the economic cycle as GDP expands during times of economic growth (which happens most of the time) and as GDP contracts during recessions (which rarely last long but do cause sharp and painful falls in stockmarkets in the order of 30% to 50%).  When a recession ends the problems of the downturn are still fresh in people’s minds and it is these worries that the stockmarket’s rally overcomes.

They have been called the four most dangerous words in investing.  Beware whenever you see the words “its going to be different this time” used to justify why it is worthwhile to join in the latest investment mania.  The mania will probably last longer than you think it will but it always ends in the same way – by not being different this time.

Professional traders who are very disciplined and accustomed to using stop-losses are the ones who truly profit from speculative bubbles & manias because they are the ones who hang onto their winnings and do not end up by giving all their winnings back again cometh the downturn.  The true professionals follow the trend up, get out & then switch to the bear tack and profit on the way back down too.

From a practical investing standpoint and no matter how compelling the argument du jour used to justify why it is going to be different this time, just don’t fall for it.  The market may sustain the latest investment mania for longer than speculators betting against it can stay solvent but, rest assured, it won’t be different this time.  As an investor you don’t have to bet against the mania, you can simply choose to protect your capital by not participating in it.

Money (notes & coins in circulation) can be thought of as the longest duration, lowest coupon government debt which can ever be issued. The central bank does not pay interest on the notes it prints (although it is possible to pay interest on commercial bank reserves held at the central bank) and the central bank never has to redeem them. That legend on the ten pound note in your pocket that says “The Bank of England promises to pay the Bearer on demand the sum of Ten Pounds” will only result in the BoE giving you another, newer, crisper, ten pound note in payment for the one you attempt to redeem.

Most people think of inflation as a rise in the price of goods and services.  The published measures of inflation (RPI and CPI) measure the rise in the price of a basket of goods and services.

However economists define inflation as an increase in the amount of money in circulation (literally inflating the stock of notes & coins in circulation).  Some people deny there is a link between an increase in the money supply and RPI/CPI.  The Bundesbank firmly believe that a link exists and have passed this belief on to the ECB which manages its policy by keeping one eye on the growth in the money supply.

A simple explanation of why the money supply does in fact affect the price of goods & services runs as follows:

Strictly inflation is defined as an increase in the money supply. Assume that increasing the money supply (by printing money) does not cause cause a rise in the price of goods & services. Then a government could print as much money as it likes and use the money to acquire ever-increasing amounts of goods, services & assets. Plainly this could not last for ever and therefore there is a tipping point beyond which printing more money will cause the price of goods & services to rise.

The problem for central banks is that nobody knows precisely where the tipping point is – which is part of the reason why central banks have such a tricky job in meeting their inflation targets.

Old songs which have stood the test of time always seem to have the best lyrics.  When thinking of a suitable title for this blog the following seemed relevant :

Men grow cold
As girls grow old,
And we all lose our charms in the end…

There may come a time
When a hard-boiled employer
Thinks you’re awful nice,
But get that ice or else no dice.

He’s your guy
When stocks are high,
But beware when they start to descend.

It’s then that those louses
Go back to their spouses.
Diamonds are a girl’s best friend.

These simple lyrics encapsulate marriage, unemployment and what happens when the money dries up.  All timeless themes relating to life, the business cycle and bull & bear markets.

I have targeted this blog at the UK private investor (whom I believe is far more intelligent & sophisticated than generally given credit for).  Terms which may be unfamiliar are expanded upon in the ‘Glossary’ articles which, when they are written, are published on Tuesdays.  Articles covering markets, sectors and commentary on FTSE 100 stocks are published on Friday mornings.  Commentary on likely turning points in the Dow, S&P and FTSE will be published when dictated by market movements.  Do not expect much to be published during the school summer holidays & Christmas holiday periods as I do like to take a holiday or two.

In general I try to write commentary which is a bit more level-headed and longer-term in nature than other commentary which can be found in newspapers.  Newspapers have to write something about the markets every day and much of their commentary inevitably focuses in great detail upon reporting current events.  I try to step back a little and focus on what the market may do over the longer-term and not worry too much about whether a share price has moved 10% up or down recently.  I firmly believe that the greatest advantage the private investor has over institutional fund managers is that the private investor can take a long-term multi-year view and is not bothered about how their portfolio has performed relative to the fund manager’s in the office next door at the end of the next quarter.  Hence I will tend to be more optimistic when markets are low and more cautious in my commentary when markets are high.

The general idea, after all, is to buy low and sell high.  Buy during panics and sell amidst euphoria.

What is Ebitda?  Whilst the acronym stands for earnings before interest, tax, depreciation & amortisation; ebitda can be thought of as essentially as the cash flowing into a company.  Capital expenditure (capex) is the extra item that needs to be subtracted from ebitda (as well as interest, tax, depreciation & amortisation) in order to arrive at earnings which remain to pay down debt and also be divided amongst shareholders as dividends.  Any money left is kept by the company as retained earnings and goes towards boosting the company’s Net Asset Value.