Break out the balloons and party hats! Nope — I’m afraid the FTSE 100 (FTSEINDICES: ^FTSE) hasn’t hit 7000 just yet — instead, we have another milestone to celebrate for UK’s leading benchmark share index.
When most UK investors think of the stock market, the FTSE 100 almost invariably comes to mind — it’s easily the world’s favourite bellwether for UK shares. On 3 January, the FTSE 100 celebrates its 30th anniversary, having been launched in 1984. Starting at the base level of 1,000 thirty years ago, the index stands at over 6,700 today.
The FTSE 100 might not have surpassed the heights it reached in the dot-com bubble, but when you compare the index to its base level, it’s a wonderful reminder of how businesses can create shareholder value over time.
Whether UK shares were trivially underpriced or overpriced at the beginning or end of the period becomes almost irrelevant when you realise the index’s total market value has increased from £164bn in 1985 to £1870bn today, excluding dividends.
I think it’s a phenomenal reminder that investing isn’t always about buying the index at 1,000 because it deserves to be 1,100 next year, or because a chartist draws a pattern on a graph. Thirty years later, such arguments seem silly, compared to the big picture of how value was created.
Over the long term, real wealth is created for shareholders as businesses become more intrinsically valuable, and more profit can be generated for stakeholders. There are more ways to “win” than simply trying to “buy low and sell high”, a method which rather forgets the whole point of business ownership, whether you get a good price or not!
Here at the Motley Fool, we’re big advocates of trying to find the businesses that can do even better than the FTSE 100 index at creating shareholder value over time. Companies that consistently generate a lot of cash relative to the amounts required to keep the business running — with the emphasis on consistently, courtesy of some kind of durable advantage over competitors, or world-class management.
In our experience, these qualities epitomise the kind of great businesses that have propelled the FTSE 100 to its heights today — and we think many of the original 100 companies still offer attractive potential in 2014. It’s no surprise to us that of the 19 constituents that have been ever-present in the index since 1984, many could have been described by our definition of “great business” thirty long years ago.
