The long bull market has made many people look clever, but they are riding a wave which could soon break.
At the end of the movie Dirty Harry, Clint Eastwood, playing the rough-edged cop, squints, looks hard into the eyes of the villain, cocks the trigger of his .44 Magnum and asks in a deep, raspy, voice: 'The question is, do you feel lucky today?'
For many of the country's leading business executives and financiers over the past 10 years - and the past three years, in particular - the answer has been an overwhelming and emphatic yes. Few periods of economic history have been quite such a joyous and easy time to be the manager of a large company - a fund manager, banker or venture capitalist - than the 1990s. It is like waking up and finding yourself in financial heaven.
Bull markets make people very rich, pretty much regardless of their ability to make the right investment decisions. But they have another interesting trick to perform as well; they make people seem clever, pretty much regardless of their intelligence or ability. Indeed, they make people who do quite dangerous and stupid things look wise and statesmanlike; a condition that often only spurs them on to even wilder shores of recklessness.
The 1990s have seen one of the greatest bull markets in financial history.
In 1990, the FTSE-100 Index was below 2,000; this year it has traded above 6,000 - a tripling in value. The American market has performed even better, rising in value about fourfold in the course of the same eight-year period.
Most of the main European markets have seen similarly feverish bull runs in share prices.
Now, imagine that you are managing a big company during this period - perhaps a bank or a pharmaceuticals giant. You have spent much of your career climbing up the corporate ladder, never having shown any great appetite or desire for either risk or original thinking. You suddenly find yourself propelled into the chief executive's office. You realise, with a slight sense of panic, that you don't really have much idea what to do. Then, after plenty of reflection, you decide to do nothing since most of the things you do tend to go wrong anyway - a strategy that sounds a lot cleverer when the chaps at the management consultancy decide to label it 'focusing on core business'.
After a couple of years, you start worrying that not much is happening within the company and that people may notice you are not up to the task.
Then you check the share price, which has been escalating ever since your unexpected promotion to the top job. You notice that it keeps going higher, showing no sign of slowing down, so you decide that keeping the share price moving upwards is the central objective of the board - a strategy that sounds a lot better when the helpful chaps at the consultancy decide to relabel it as 'enhancing shareholder value'.
Never mind, you might reflect as you put your feet up on the desk and light up a fresh cigar, that being a 'shareholder value' type of chief executive during one of the greatest bull markets in history is about as hard as being a rain dancer in Manchester in January. Everyone is impressed by your ability to increase the share price and nobody seems to mind if you throw in a few million for yourself for all the hard work. There are few better examples of what the cowboys used to call 'sheer dumb-assed luck'.
Take, for example, the case of SmithKline Beecham's chief executive, Jan Leschly, who has found business to be a more lucrative profession than his former trade of professional tennis player (and one where you don't even get caught out by dodgy line calls). Earlier this year, it was revealed that Leschly had collected around £100 million in salary, bonus and share option deals for the, no doubt, challenging task of clocking into work at SmithKline every day. On the news being broken, SmithKline was able to bat away any criticism by pointing to the vast amounts of 'shareholder value' Leschly had created in his time as chief executive of the company. 'We have created £33 million of shareholder value for every day of last year,' Smithkline's public relations staff intoned monotonously whenever anyone called to question its generosity towards its leader.
It sounds good - Leschly, after all, is only collecting three days' worth of shareholders' money - until you apply the 'Bozo the dog' test. That asks the pertinent question: what would have happened if they had put Bozo, or one of his canine chums, in charge of the company. In a bull market, SmithKline's share price would have certainly gone up anyway, just as the share prices of all its rivals did.
To make any logical defence of the payments, SmithKline's public relations people would have to prove Leschly had created substantially more wealth for shareholders than rivals such as Sir David Barnes at Zeneca or Sir Richard Sykes at Glaxo Wellcome. Which, of course, he hasn't. SmithKline's share price has exactly matched Glaxo Wellcome's during the year, and only slightly outperformed Zeneca's. The justification for his vast pay-out amounts to nothing more than sheer bull-market luck.
Leschly's may be a particularly gross example of managers who have been made to appear wise beyond their abilities by the long bull market in equities, but he is by no means the only one. Take the example of Sir Brian Pitman, chairman of Lloyds-TSB, and by general consensus one of the wisest and best managers in the UK. Pitman is far from a disaster, but there are few who would dispute that he has been flattered by the performance of Lloyds' share price, which has risen more than tenfold during his period in command. Or, likewise Derek Wanless at NatWest, who most people would argue has had an unhappy time as chief executive; a trader running amok cost it tens of millions, and its strategy of expanding in investment banking collapsed. And yet, to judge by the share price, Wanless has been a great success. In 1992, when he became chief executive, NatWest's shares stood at 263p. By August, after some belatedly promising first-half results for this year, they were trading well above £11, Even before the good news, NatWest had been bouyed by the long bull market in bank shares. There might be plenty of criticism over Wanless' performance but in the end it comes to nothing because the City has never minded sufficiently to argue with a rising share price.
In the late 1980s, and in the first three years of this decade, it was not uncommon for chief executives to get fired from running companies for generally making a mess of things. George Davies got kicked out of Next, Sir Ralph Halpern from Burton, Sir Bob Horton from BP, and Ernie Mario from Glaxo (before it merged with Wellcome) all paid the price for their own unique combinations of arrogance and incompetence. And yet, it was no coincidence that all those companies had seen their shares perform terribly before shareholders were stirred to remove them from their posts.
In the past three years, it has been almost unheard of for any senior manager to be forced to walk the plank. In a bull market, all mistakes are forgiven and forgotten.
It is not just the men, and few women, running big FTSE companies who have been made to look smart. Plenty of other people have joined in the fun. Take, for example, some of the business people participating in management buy-outs. There could be few better examples than Sandy Anderson, the charming and gentle former railwayman who used to run the Porterbrook rail leasing company, and who often goes, in the popular press at least, under the affectionate sobriquet of The Fat Controller.
Anderson, a quiet and modest man, had made a modest living as a British Rail official for most of his life. During the privatisation of the rail network, he had the chance to head up one of the companies that would own the rolling stocks and lease it out to the operating companies. In 1995, his company, Porterbrook, was privatised to a management buy-out team backed by venture capitalists, for which the government collected £527 million. Only seven months later, Stagecoach moved in to buy the company for £825 million, creating an instant windfall for the managers and their backers of about £300 million.
Anderson himself collected £33 million for less than a year's work; more than is collected by any National Lottery winner and for about as much work, and a bit less risk (most Lottery players lose £1 each time they play, whereas few MBO teams lose anything). The stake he had put at risk was a mere £150,000. The Porterbrook sale prompted a huge public and political outcry, but the managers involved were still allowed to keep their money.
Anderson was far from alone. About six months later, another of the rail leasing companies was sold. Eversholt (named after the dingy London street near Euston where British Rail used to be headquartered) had been bought by its managers from the government for £569 million. Only a little more than a year later it was sold to Forward Trust, a subsidiary of HSBC Holdings, for £788 million, netting an instant fortune for the managers involved with the deal. The leader of the team, Andrew Jukes, a chartered accountant whose only previous brush with the limelight was during his failed attempt at standing as a Liberal Democrat candidate for Oxtead Parish Council, made almost £16 million in a year, a stunning return on an initial investment of £110,000. His non-executive chairman, Peter Harper, who worked at the company one day a week, and who had invested £19,200 in the deal, collected £2.9 million from the sale.
Luck on that scale is exceptional, but there have been plenty of managers who have made more modest sums by the same route. Management buy-outs have become the accepted method by which ordinary career managers can make fortunes beyond their own expectations. In the past, business types had to have the appetite for risk and the desire for independence to create their own companies in order to make vast wealth. Now they just have to sit around waiting for head office to tire of their division (running it badly helps them along), then put in a bid, buy it, and float it a couple of years later, then pocket the difference.
It might be argued that in the case of rail companies, the government sold the assets too cheaply, and there is no doubt that there is an element of truth in that. But in most cases, the gains on management buy-outs have been created by the bull run in asset values. Most management buy-out teams like to waffle on about all the creative energy that has been released by the deal, and all the fat that has been cut out of the business since it was placed in private hands but, in fact, all that has usually happened has been that it has benefited from a couple of years of asset inflation.
In a bull market, the prices of all companies rise constantly and management buy-out teams are just the beneficiaries of that trend. When they try to pretend the money made is the result of their own cleverness, it sounds as convincing as someone who tells you their house has risen in value not because of the general boom in house prices but because of the clever way they arranged the gnomes in the front garden. It isn't true. They were just lucky.
But, for all their faults, at least the management buy-out teams don't push their luck in the same way as the private equity funds. Any jury looking to award a prize for Britain's luckiest businessmen would have to consider seriously the claims of Guy Hands, Nomura's hotshot financier, who last year claimed the title of the country's highest-paid man with a pay packet of £40 million.
A 39-year-old former Goldman Sachs staffer, in the past three years at the London branch of the Japanese stockbroker, Hands has spent £8 billion buying up companies as diverse as the Thorn TV rental business, the Intrapreneur chain of pubs, and the William Hill bookies chain (the last one presumably to diversify into a more respectable and safer line of business). His is perhaps the greatest splurge of financial showmanship since the corporate raiders of the 1980s ran out of cash, and the foundations of his business are probably about as solid. Nomura's technique is to buy a company, then raise the money through issuing bonds secured on the cash-flow of the acquired company. It hangs on to the equity on which it can turn a profit through a flotation or a trade sale a couple of years down the line.
There can be quite a lot of smoke and mirrors surrounding each deal, but the basic idea is simple. If you went to the bank, borrowed all the money it would loan you, then put it all into an index fund, as long as the market rose strongly, you could, in a couple of years, sell the fund, pay back the money, and collect a huge profit. It is the same trick that Nomura and his hoards of imitators perform, and it works fine in a bull market. Everyone comes out ahead, looking very clever in the process.
But in a bear market, the same trick looks terrifying. Borrowing money to buy equities looks good in a bull market, but it is no smarter than using your credit card at the bookies. Most companies will tell you they often can't compete with Nomura and the other private equity funds because they pay so much for their acquisitions, usually more than they are really worth. When the inevitable downturn starts, the veneer of cleverness that surrounds Hands and his imitators will melt away very quickly.
Still, at least Hands has the decency to whistle up a new tune (even if it has more than a passing resemblance to the rhythms drummed out by the likes of Lord Hanson and the other financial conglomerates in the 1980s). The luckiest category of business people over the past few years has been the small group running the big asset management companies. They have been able to sit back, do nothing and run off with huge bonuses all through the bull run. Take, for example, the largest of them all, Mercury Asset Management, and its two overlords, Hugh Stevenson and Carol Galley.
Both of them achieved the intellectually strenuous task of keeping the value of their funds rising while share prices generally went up, a feat for which they rewarded themselves with multimillion salaries and bonuses (Galley, for example, collected £2.2 million last year).
In reality fund management is not really their thing. In 1997, its UK Equity Fund, one of the few funds it runs for which performance figures are published, managed to score a return of just 12.7%, when the average return for the sector was 21.1%; in fact, in a ranking of the 52 similarly pooled pension funds in the City, Mercury Asset Management managed to come 52nd, hardly a great performance. Even so, the magic of a bull market meant that despite that, Merrill Lynch still stepped in to buy Mercury Asset Management for more than £3 billion.
The beauty of running an investment firm is that during a bull market it doesn't really matter whether you are much good or not at your job; the market forgives all your mistakes. The general measure of success in the industry is the size of funds under management, which the managers like to pretend reflects their success as investment wizards. In fact, if you happen to be running a pile of pension funds in a bull market, inevitably the funds under management balloon and the 1% you collect in fees also rises astronomically.
Even better, a big American company then offers to buy you out, allowing you to cash in all the money before your luck runs out.
Yet, if the fund managers are lucky, so are the ordinary investors. Anyone looking back on the financial bubble of the late 1990s will be struck by the strange and inexplicable phenomenon of the tracker fund. Designed to match the performance of the funds they track, the trick with a tracker is to take all the intelligence out of investment. In the view of most ordinary people buying personal equity plans and pensions, this makes them 'safer' than other investments - a view heavily promoted by the firms that sell them.
Though people are right to be cynical about the abilities of most fund managers, trackers are one of the dumbest answers to a bull market. By their nature, the tracker 'fun buys'; it is doubtful if any evil genius designing something to create a speculative bubble, and to lose people lots of money, could have come up with a better device than a tracker.
Those that are buying them should thank their stars every morning their funds are still worth something.
There is nothing wrong with anyone making money from a bull market any more than there is anything wrong with people making money in a casino.
But when someone walks away from the roulette table with a stack of chips telling you how clever they are and how good they are at managing the odds, it is time to check your wallet.
Matthew Lynn's new novel The Watchmen is available from Heinemann at £10
Jan Leschly, SmithKline Beecham
Kept the share price rising at the pharmaceuticals giant after aborting two planned mergers
The former tennis professional collected about £100 million last year in salary bonus and option deals Bottom Line
Begs the question: what would have happened if 'Bozo the dog' or of one his canine chums had been in charge of the company?
In a bull market SmithKline Beecham's share price would have gone up anyway
Guy Hands, Nomura
Spent £8 billion buying companies, in what must count as the greatest splurge of financial showmanship since the 1980s. The high prices paid elbowed out competitive bidders
Collected £40 million last year Bottom Line
Borrowing money to buy equities looks very clever in a bull market but it is no smarter than using a credit card at the bookies
MANAGEMENT BUY-OUT MANAGER
Sandy Anderson, Porterbrook
Invested £150,000 in a rail leasing company. Then sold it seven months later
Collected a cool £33 million - more than £4.5 million for each month in charge
Buy-outs have become an accepted route by which ordinary managers are able to collect more than any National Lottery winner
LADY LUCK SMILES AT SOME AND SNEERS AT OTHERS
There is certainly no shortage of candidates for the luckiest business person in history. Bill Gates' big break in getting Microsoft to use his operating system must be one of the best strokes of good fortune ever.
John D Rockefeller's foray into the oil industry must rank pretty highly in the oh-lucky-man stakes, too. But our prize for history's luckiest goes to Paul Sacher and the Hoffman family whose stake in the drugs company Roche is worth £11 billion; they had given up any role in the running of the company when it stumbled across the formula for Valium, the drug that was to turn it into the world's biggest drugs company.
The unluckiest in history, on the other hand, must surely the Reichmann brothers, who sank most of their net worth into building Canary Wharf.
The development is now a success, but it left their company broke in the process. We should also spare a thought for anyone with the misfortune to be managing a Japanese company in the past decade. No matter how well you are doing, your shares will sink like stones. And of course for Tony Dye, head of PDFM, who (probably wisely) pulled his investors' money out of the stock market. It has soared ever since.