The aim of this paper is to illustrate in some detail a practical approach to the process of forming a judgment of the investment scene as it is likely to be presented to the U.K. investor. It falls into four parts, namely:

1. Theoretical base.

2. Survey of type of variations in stock markets and the factors affecting them.

3. Methods of diagnosing trends.

4. An approach to forecasting.

The last part occupies only a small proportion of the space since the formation of a judgment in investment work, as in most other fields, is only ‘10% inspiration’.

It has been remarked on many occasions that whilst there is a plethora of material which has been contributed to the Institute and the Students' Society on the actuarial valuation of liabilities, the subject of valuation of assets seems to have been consistently overlooked by all save one or two authors. We believe that a compelling reason for this apparent indifference to the subject may be found in the trend of interest rates within the experience of the actuaries who introduced the valuation techniques which a student may now tend to take for granted.

Consider Table 1, compiled from information given in a paper by C. M. Douglas, F.F.A., on ‘The Statistical Groundwork of Investment Policy’. During the period 1833–1912 the average annual rate neither exceeded £3. 11s. od.% nor fell below £2. 9s od.%, and in general the yield drifted slowly downwards.

In working his way through the Institute syllabus the student deals in Section C with subjects rather baldly described as ‘Sources of National Income and Expenditure’, ‘Introduction to Government Finance’, and at a later stage, with the money market and banking and financial institutions. What disciplines these impose on the student I have only a vague idea for I am now a ‘vintage’ actuary in the sense that this is used as being synonymous with ‘old crock’. However, I see from the Year Book that ‘members of the profession are recognized as especially competent to advise on financial problems’ and I take it that the purpose of this meeting is to help newly qualified actuaries towards the attainment of this special competence.

My subject tonight is the budget, and although it is given to few actuaries to advise on the making of the budget we must all know how to discuss it intelligently, for clearly our judgment of the national economy underlies our reading of nearly all other financial problems.