Gareth Howlett: Watch for potholes, but we're in the right direction for the road to recovery IT'S THE time of year when the pundit-o-meter spikes upwards as experts of all kinds try to get right what they usually get wrong - market predictions. It's not a game I feel comfortable playing. Every January for the past 28 years I've been asked where I think the markets are going, and every time I've given more or less the same deflating answer: I'm not sure. The difference is, when I started in the business the answer was based on ignorance; today, it rests on quite a lot of experience. What that experience has taught me, among other things, is that investment is one of a very few areas of life where it is, surprisingly, easier to make some kinds of forecast the further ahead you look. The kind of forecast I am thinking of is actually pretty important: whether you will make money in the stock market, for example. This is a fascinating paradox which you can turn to your advantage if you properly understand its implications. Unfortunately, there is a rather perverse streak in human nature which attaches most importance to what is going to happen next - which in truth doesn't matter a great deal - and cares less about how the story is going to work out in the end, which matters a great deal more. I frankly do not know whether the recent rally in share prices which began in December is going to last for the rest of the first quarter or whether it is going to run out of steam, but there are an awful lot of theorists and gurus out there who will tell you (or sell you) their opinions. However, my confidence that you will make money from shares rises steadily with the passage of time. Cautiously confident over one year; quite a lot more confident over five; pretty much stone cold certain, bet-the-ranch confident over 20. Twenty years! What use is that to me? Fair question. Here's what I think is a fair answer. A lot of active private investors are professional people in their forties and fifties who are building up a nest egg for retirement. With final salary pension schemes in retreat, and the state pension now more of a safety net than a sole source of retirement income, these people have read the signs and understood that the person primarily responsible for their long-term financial future is the person whose face they see in the mirror. A 50-year-old man in reasonable health has, according to most actuarial calculations, a good chance of surviving into his eighties. With more than 30 years to go, the question is not "why bother with equities?" but "what reason do I have not to invest in equities?" In the short term, there are many reasons to be cautious. Public finances in much of the developed world are in a fragile position, and the political compromises which have kept the show on the road in both the US and Europe are precarious. The only yardstick which makes shares look unambiguously cheap is government bond yields. They, thanks to concerted manipulation by the authorities in order to rescue the banks, are at miserably low levels; when compared with their own long-term averages, most equity markets are either fairly valued or even expensive. And those valuations are applied to corporate profit margins and returns on equity which, using the same "relative to historical averages" measure, are definitely on the high side. When you toss into the mix a growing clamour of bullish opinion, the cynical observer might conclude that from here the most likely surprises are going to be nasty ones. When I read this week that one of the City's most resolutely bearish analysts has grudgingly conceded that now could be a time to pile in, I can't help thinking back to 1999. In that year the head of one of London's leading fund management houses, who had for some years been convinced that markets were overvalued, was sacked, with uncanny precision, on the very day the FTSE hit an all-time high. So the risks of a pothole in the road are there. But that road is leading in the right direction: to the higher real returns, after allowing for the corrosive effects of inflation, which equities give the investor over the long term, as a compensation for those very real short term risks. Gareth Howlett is fund manager director at Brooks Macdonald Asset Management