Keeping in with the bulls and the bears

You may have noticed that during the past three months I have not recommended any new shares. I have suggested cutting losses on the few of my recommendations that did not work out, and I have also continually stressed that you should run the substantial profits on the successful recommendations (subject to a running stop-loss triggered at 25 per cent below the highest point reached since purchase). There is always an added attraction in running profits - in that way you do not crystallise the capital gains tax liability, so in effect the government makes you an interest-free loan of the tax you would otherwise have to pay.

I am not bearish about equities long term, but we could be at the beginning of a big correction. I hope, in that event, I will be able to recommend to you the few new shares I have in mind, at prices below today's levels. If the market recovers, I will still probably recommend the same shares. But in that event you will be buying at a safer time, so you could not grudge paying a little more.

In early January, I suggested a 15 per cent cash content for your portfolio. Later in February, when Alan Greenspan gave interest rates their first rise for five years, I suggested upping your cash to 25 per cent.

THE MUG INDEX

Nobody knows which way the market is heading. Even top money men find the market's overall direction very difficult to judge. This is well illustrated by the fact that in America, particularly, if most fund managers are bearish this is taken as a bullish sign, and vice versa, so even the experts constitute a kind of mug index. There is, of course, a rough logic to support this approach - if the majority of fund managers are bullish, the money under their control will be fully invested. In due course, when they decide to take profits, their sales might precipitate a bear market. Similarly, if most of the fund managers are bearish, there will be plenty of cash around waiting to be reinvested - the seeds of the next bull market.

We all know the case for a continuing bull market - the golden scenario of rising earnings, low inflation and low interest rates. The overspill of monies from American mutual funds, record sales by our own unit trusts and record amounts being raised by UK investment trusts continue to fuel the market. The case for a bear market is also quite convincing: after the first increase in American interest rates, there is the worry that the flow of overseas money might begin to reverse; world stock market ratings are already very high by historical standards; and a continuing massive UK trade deficit carries with it the risk of much weaker sterling and a possible end to interest-rate cuts.

Also, the Government's standing is at a very low ebb, with 1996 not all that far away. Certainly, by early 1995, the market will begin to discount the chances of a Labour victory.

MOVING INTO CASH

I find it very difficult to weigh up the various factors and reach a definite conclusion. That is why I have moved into 35 per cent cash and have sold off all speculative holdings. By the word 'speculative' I mean those shares not supported by strong and realistic fundamentals in the form of rapidly increasing future earnings. I have warned you already about shells and bio-tech stocks, which will be amongst the first to suffer if there is a big decline.

By taking this action, I now have a foot in both the bull and bear markets. By selecting the right kind of shares, a smaller amount invested in my portfolio should provide sufficient capital growth to give an above-average performance overall, if the market continues to rise. If not, the cash content will be a nice start to going more liquid and then taking advantage of much lower prices after the correction.

Cash has one great advantage over shares. In difficult times, it is much easier to turn cash into shares than shares into cash.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.