For example as the chart suggests according to Mr Shiller's calculations it is simply not possible to

For example, as the chart suggests, according to Mr Shiller's calculations it is simply not possible to reconcile today's level of the US market with any realistic or plausible assessment of the future dividend paying capacity of the companies whose share are quoted on it.His own assumption is stock prices often "have a life of their own" and can only sensibly be explained by a combination of economic and non-economic factors. He argues there are psychological and institutional factors, which combine to drive stock markets periodically into periods of self-reinforcing excess (what systems thinkers call "feedback loops" and Mr Shiller describes as "naturally occurring Ponzi schemes").Such periods as the current bullmarket do depend on powerful and positive underlying features. Mr Shiller lists 12, including falling inflation and falling interest rates, the internet, the collapse of communism, the baby boom, and so on. But while these are necessary conditions for a sustained market boom, they alone cannot explain the process by which boom becomes bubble. For that, Mr Shiller argues, we have to look at cultural and psychological factors.For example, Mr Shiller points to psychological studies which show many investorsadmit to acting more impulsively when buying shares that have gone up rapidly in the recent past than they do with duller performers.

He also points to evidence that people are more likely to act on advice received directly from individuals than from impersonal sources - a factor that neatly links the 1990s (with the novel phenomenon of Net-based chat rooms) to the speculative 1920s (when the telephone for the first time became a popular medium of communication).The relentless focus of the media on money and get rich ideas is another integral part of the process, Mr Shiller suggests. So, too, is the subtle way in which the idea that shares always produce the best long term results has moved from being a reasonably well documented fact (true, but only within limits and under certain conditions) to an article of faith which leads investors to believe that markets can and will continue to rise 15 per cent or 30 per cent a year indefinitely (which is an impossibility).Most of this is a convincing explanation of how bubbles occur, but says nothing about when and how it might end. What is not in doubt is the answer ultimately lies somewhere in the nature of the human psyche This is a good time to be alive. The internet allows all of us to see we are living through a period of profound technological change. It is easy to assume life will go on the same way for the foreseeable future. History suggests otherwise, but even institutional investors are just as prone to this illusion as are individuals.davisbiz aol .

By Keiron Root By Keiron Root 21 June 2000George Luckraft started his fund management career while still a student, reading engineering and land economy at Cambridge.He says: "I got into fund management by accident. John Carrington, who set up Carrington Pembroke, was a friend of my parents and I was aware I needed a vacation job to supplement my grant, so I went to work for him in the firm's back office. Then a year before I graduated he offered me a job on the condition I did not get a first because if you get a first class degree you clearly have no common sense."Having avoided this distinction, Mr Luckraft started with Carrington Pembroke in July 1980 and, to all intents and purposes, has been with the same firm ever since. When John Carrington retired in October 1996, Carrington Pembroke was acquired by the Dutch banking group ABN AMRO and integrated into the group's asset management business.By this stage, Mr Luckraft was already in charge of what is now the ABN AMRO Equity Income Fund, which had been acquired by Carrington Pembroke from Brown Shipley in October 1993, and he has been running the portfolio ever since.

He says: "Its key objective is to generate a level of income that is at least 10 per cent above that of the FT All Share Index. In fact, I aim to produce income that is 20 per cent above that of the index."The current yield on the fund is just under this target level - 2.55 per cent, which is about 18.6 per cent above the All Share's 2.15 per cent.One of the more distinctive aspects of Mr Luckraft's recent investment policy has been his increasing willingness to include what are generally perceived as growth stocks within an equity income portfolio.He explains: "I have taken the view that traditional income stocks are going nowhere and the rise of the technology sectors will have a deflationary effect, which, in turn, means traditional business models are under threat."About a year or so ago, I was faced with a portfolio of stocks that were going down and that was not a terribly sensible position to be in. So I decided to split the portfolio into two parts, one containing growth stocks and the other with more traditional income stocks." The advantage of doing this is it means the overall value of the portfolio can be maintained, with the growth element providing the resources to reinforce the yield.Mr Luckraft says: "The idea is to take profits on the growth side and use them to buy income stocks to maintain the yield. So in March and April of this year, I was moving money out of growth areas, like technology, and buying a lot of the bombed out stocks at the bottom, things like Scottish & Newcastle or United Utilities."But, the fact that the fund is benchmarked relative to the main UK market index means it has to maintain a broad spread of holdings across the market. Currently, there are 77 holdings, which are roughly split 33 per cent in large cap (i.e. FTSE 100) stocks, 15.5 per cent in mid caps, 40 per cent in listed small caps and 8 per cent in AIM stocks, with the remainder of the portfolio in cash.Mr Luckraft adds: "The portfolio generally has at least one third in FTSE stocks, which inevitably means quite a lot in banks, but the biggest sector in the portfolio at the moment is software and computer services." In fact, this group of stocks accounts for almost 11 per cent of the portfolio, followed by banks (8 per cent), household goods and textiles (7.4 per cent), oil & gas (5.6 per cent), distributors and telecoms (5 per cent each).The relatively high proportion of technology-rated funds helps to explain the fund's strong total return figures over the past year (an increase of over 47 per cent in the year to 1 June 2000).Mr Luckraft is keen to stress the importance of active management and individual stockpicking to his portfolio. "The portfolio is generally quite stock-specific, with its top ten holdings all around 2 per cent of the portfolio.