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Ancient wisdom goes a long way

By Peter V O'Brien

Friday 28th March 2003

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Historical fact and conventional wisdom suggest Monday could see some unusual movements in share prices. The date is March 31 and a balance day for many managed funds.

A coincidence of March 31 and Easter complicated the longstanding trend in 2002 and there are new complications this year.

Strong sharemarkets while war is under way in the world's second-most politically volatile region may seem bizarre or repugnant.

Both views are immaterial to last week's percentage rise in the US Dow-Jones industrial stock index being the best weekly gain since 1982.

Markets dislike uncertainty and thrive on certainty. Talk of war over the past six months caused uncertainty. The US-led attack on Iraq created certainty, albeit a rather perverse certainty.

Some investors ­ or speculators ­ could come unstuck if their perceptions of a quick outcome prove wrong and US and British forces get bogged down in prolonged street-by-street battles in Baghdad. The city's population is apparently a little bigger than that of New Zealand, to put the issue to perspective.

It was noted here on January 31 the London gold price increased 5.4% between December 31 and January 24. London silver gained 3.6% in the same period and platinum's 9.3%.

Gold peaked at $US376.55 an ounce on February 4 and silver at $US4.96 an ounce the same day, increases respectively of 8.5% and 5.3%. The gold price was back to $US333.50 last Friday, down 11.4% since February 4, and silver came back 12.3% to $US4.35.

Both prices were less than those of December 31. The idea that precious metals, particularly gold, are "safe havens" in times of crisis may be valid when people get caught up in fears about uncertainty, but once again was eroded in the presence of certainty.

Prices for oil for future delivery shot into the high $US30s a barrel in early March but were $US23-24 last Friday, about 23% lower than the close on December 31 and 38% under the 2003 highs.

Commodity price movements this year, and regular ups and downs of world sharemarkets when people reacted to perceived crises and uncertainty and then to the apparent resolution of the crises and return of certainty should have destroyed the concept of "rational" markets.

The only "rationality" in markets is the guarantee that the majority of participants will adopt the same approach, irrespective of its merit.

Business media operators do nothing to change the situation when their daily assessments of markets are based on a "get an expert quote" approach.

There is an old cliché that free advice is worth exactly what you paid for it. Private investors should always consider why people with apparent expertise should be available to share wisdom with everyone when they are involved with firms and funds whose business is making money for their organisations from existing or potential clients.

Altruism is hardly the driving force. Publicity, leading to a move of clients from competing firms to their own is more likely, but the effectiveness of that is doubtful.

An ancient Latin saying (translated with appropriate assurances that it has no application to those of modern Hellenic descent) is: "I fear the Greeks, even when they come bearing gifts." Private investors should heed the warning, after substituting "analysts" and/or "brokers" for "Greeks."

Investment experts had no better knowledge than the rest of us about what was going on in Iraq this week. More importantly, they were in no position to forecast future world political, economic or investment outcomes, irrespective of whether the war is short, long/or already over.

Reflect on the fact that the top investment adviser at the then second biggest world insurance group, with significant business in Afghanistan when the Soviet Union invaded that country in 1979, was invaluable to directors and management. His honours degree from Oxford was in ancient history. You are unable to get much more ancient than the area from the Eastern Mediterranean to Asia.

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