No Pain, No Gain: We need new blood at this hazardous trading time

The No Pain, No Gain portfolio starts 2006 in good heart but in some need of new blood. Two newcomers are required to bring its membership back to 16 - in my view its ideal strength.

However, I have no intention of rushing into hasty buy decisions I will later regret. The opening week of a new year is a hazardous time for indulging in stock picking. Almost every Tom, Dick and Harry feels obliged to offer his winning formula for the coming 12 months and, with trading slack, many chosen shares are accorded flattering and inflated valuations.

The fact the new altitudes are often unjustified soon becomes apparent as the dark and dismal hangover days of January unfold. So, don't expect any significant portfolio changes in the next week or so. I intend to let the season of good cheer and of ill-considered share tips take its course before, hopefully, alighting on a few realistically priced winners.

My reluctance to get involved in the current round of tipping individual shares does not preclude me from hazarding a guess about the direction of the stock market and mulling over last year's extraordinary performance. When I embraced the always-dangerous act of prediction last year, I went against the herd and suggested the Footsie, covering the leading 100 shares, would top 5,500 points. Most analysts and commentators were negative but I felt the atmosphere was not as oppressive as they believed and there was room for a much more unfettered approach.

Forgive my triumphalism. It was a rare success. Often my yearly forecasts have turned out to be hopelessly wrong. So it was a pleasant change to avoid sackcloth and ashes.

In the event, the stock market, helped by a string of take-over bids, even exceeded my estimate, with the Footsie going above 5,600. But it was the 250 mid-cap shares that really caught my attention.

It is an area where, unfortunately, the portfolio is under strength with just one constituent (the reasonably performing Stagecoach). The mid-capers, as represented by the FTSE 250 index, comfortably outperformed the heavyweight blue chips. As the Footsie measurement is becoming unrepresentative more attention should be paid to the second tier index.

I was disappointed by the overall performance of small-cap shares. They made strong progress but, encouraged by their record in recent years, I had blithely expected an even more rip-roaring display.

I believe the stock market will enjoy another splendid run this year. I notice many of the City's investment houses are confidently predicting the Footsie will top 6,000 points. There is even talk of more spectacular headway. Perhaps, unsurprisingly, I have not encountered anyone who thinks we will enjoy a fantastic soaraway year with the index topping its previous high when, at the peak of the madcap dotcom escapade, it got near to 7,000.

Although I am not running against the herd this time, I do not go along with some of the more optimistic predictions. My own guess is that shares will continue to advance - at least for the first nine months or so. The Footsie may well comfortably top 6,000 at some stage but by the time we are celebrating the arrival of another new year it could be hovering around a respectable but not exciting 5,900 as high energy costs hit home. I would expect mid-caps, and especially small-caps, to turn in rather more impressive displays.

It should be remembered that forecasting the general stock market movement over the 12 months of a calendar year is really a fool's game. It is an old habit with little merit. And, of course, the unexpected, such as another appalling act of terrorism, could upset even the most carefully crafted forecasts. Many hedge funds are supposed to employ the top economic and investment brains. Yet there are embarrassing examples of wrong calls.

I believe that on normally accepted yardsticks shares remain enticingly cheap. And with takeover activity likely to continue there is no reason not to be bullish. I, not surprisingly, hope the portfolio, currently embracing two Footsie stocks, one mid-cap and 11 small-caps, will make further headway.

At the year-end it was showing a profit of around £74,000 from a total investment of £185,000.

Dividends are not included in my calculations, but they could have produced some £30,000 during the portfolio's near seven years' existence. I do not allow for dealing costs but they should not have totalled more than a few thousand pounds.