Aim stocks are back in favour: the FTSE Aim index has hit its highest level since 2001, having risen 40 per cent since last July. All equity investors – even those who don’t own Aim stocks – should be concerned by this.
History tells us that Aim shares are very often overpriced. This is why, even after their recent good run, they have for so long underperformed the All-Share index: in the past 20 years they’ve delivered a total return of 29 per cent compared with 179 per cent from the All-Share index.
Such underperformance reflects the fact that investors traditionally pay too much for speculative shares. Just as gamblers on horses bet too much on outsiders and not enough on favourites, so stockpickers are overly drawn to shares with a small chance of big returns to the neglect of better chances of steadier pay-offs. Relatedly, we often pay too much for glamorous stocks. Which makes for the best conversation: “I’ve just bought ITM Power; they make fuel cells that could save the planet” or “I’ve just bought Reckitt Benckiser: they make Dettol”? For these two reasons, the long-term underperformance of Aim shares is the flipside of the good performance of defensives.