Sunday, 2 August 2009

C&B: the FTSE 100

The world is full of explanations. Millions of words in newspapers, books and – of course – the internet means we are the best informed people the world has ever known. But this massive growth in availability of information is a mixed blessing. Just because we have the information does not automatically mean we understand the world any better, and in some cases makes it worse.

This is one reason I have for writing this book (and for this book to be read). Because while some stories can be understood at a glance – a football score, for instance – others, like finance, take more explaining.

The dangers of confusing finance for a simple story can be easily demonstrated. There is a convention that part of the evening's television news broadcast in Britain is to read out the closing figure of the FTSE 100, a leading index of London shares.

Few people know a great deal what this number means, what the index consists of, or why they should care. What they do know is that it has something to do with shares, and it kind of matters in some way to the British economy whether it is up or down.

The truth of the matter is that the day’s FTSE 100 result rarely matters to the millions of people watching the news. Viewers’ money might be invested in many of these shares, but the day-to-day result of one index of these shares will rarely tell us much, apart from on very occasional days.

It is a little like reporting football by reading out the total number of people that attended a match that day. Interesting, but not usually what you want to know.

Unfortunately, it is possible that the convention of reading out a near-meaningless number of a share index does more harm than good. For this daily incantation of a figure tells many people three things about finance: it is incomprehensible, it is full of numbers and it is something about shares.

By the end of this book, I hope that you will see that finance is none of these things. It is pretty easy to understand, it is largely about people and the things they do, and it is not really about shares at all.

And yes, there is a functional reason to read this book, other than for pure education: by the end of the book you will be much better equipped to read the financial press and know who to trust with your money.

Next: values, managing the economy and beating the market.

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