Many Small Investors Have Big League Savvy

While big-money Wall Street was showing signs of panic during the record stock market plunge in early September, retired businessman Martin Feinstein, 73, stayed cool.

“Whenever the stock market starts going crazy like this, it reminds me of the Great Crash (of 1929) and I think about pulling my money out for good,” said Feinstein.

But he decided to ride out Wall Street’s latest storm, concerned as he was about the irrational influence of computerized program trading, which is large-scale buying and selling of stocks while taking an opposite position in a stock index future or option, based on complex computer models.

At one time, Wall Street pros waited like sharks for indications of what small investors such as Feinstein were doing, so that they could do the opposite. The conventional wisdom was that small investors always were wrong, buying at the market tops and selling in panic at the first sign of trouble.

However, that perception is undergoing a transformation.

“The market has changed dramatically in recent years, and so has the role of the individual investor,” said Robert Edwards of the American Assn. of Individual Investors.

Many small investors now put their cash in mutual funds, huge professionally managed investment pools that have grown dramatically in recent years. This has furthered the domination of the market by institutions, which control over 90% of daily volume. A decade ago it was about 60%.

Increasing Sophistication

Those individuals who remain in the market, such as Feinstein, often stick to long-range investment strategies, even during dramatic shifts like the September sell-off, according to interviews with individual investors and experts.

They tend to be well-informed and affluent, and sophisticated enough to expect the violent swings triggered by program trading. Beyond simply coping with their influence, some have developed profitable strategies to exploit them.

“I want to buy the companies the institutions dump,” said Eric George, 36, a staff writer for the Kentucky Commission on Human Rights.

At the end of August, before the institutions began their selling binge, George had already sold most of his stocks. His readings of the financial press and investment advisories prompted him to do so.

“You just don’t play on the railroad tracks when you see the train coming,” he said.

Small investors can take advantage of the explosion in investment advisories, computer financial software, cable-television broadcasts and beefed-up financial pages in newspapers, Edwards notes.

Higher Commissions

But not all changes have worked to the benefit of the individual. Though deregulation begun in 1975 has lowered commissions for big investors, commissions charged some small investors have risen. The minimum commission has grown to $30 from $6, and major brokers have raised incentives for salesmen to concentrate on the bigger clients, sometimes ignoring the smaller ones.

Some small investors have responded by forming investment clubs, which have enjoyed a comeback in recent years, though with some evolutionary changes suited to the changing background. In the past, the clubs were part social and part economic, and the prime thrust was to pool funds and buy stocks. The emphasis now is on the pooling of ideas.

“You might be surprised if you saw how one of these clubs operates,” said Kenneth Janke, president of the National Assn. of Investment Clubs, whose membership has doubled to over 6,000 since 1980.

“It’s not a group of grandmas in tennis shoes without enough money to invest on their own,” said Janke. “The pooling of money is secondary to the first goal of the clubs--which is educational.”

Linda Gordon, a chamber of commerce official in Bowling Green, Ohio, who is a member of a stock investing club, said: “Our monthly meetings are a good way for me to get a lot of information about stocks through other members. Each month, one person researches a stock, then we decide whether to invest. It’s not a social hour, it’s a time for us to learn from each other.”

Some say it is unlikely that investment clubs ever again will claim as large a role as they once enjoyed. Membership in the national association was more than 11,000 in the 1960s--since then, life styles have changed to make club-joining more of a luxury.

At one time, housewives banded together to start clubs that met during the day. But more than half the mothers of dependent children are now in the work force, curtailing a major source of members.

To meet the changing needs of members, Janke said his organization had expanded its role by sponsoring seminars and disseminating information. He says members now tend to be affluent and older, with investment portfolios averaging more than $50,000 and average returns comparing favorably with professional fund managers.

Professionals Chided

“I chide my professional colleagues because, when you look at the performance of these individuals, they probably do better than the professionals do over the long haul,” he said.

Unlike the older National Assn. of Investment Clubs, the Assn. of Individual Investors has never attempted to sponsor fund-pooling to buy stocks or stock picking.

Instead, by teaching individuals how to invest, the nonprofit organization for small investors has grown to become the largest of any investment organization for individuals, from just 8,000 members five years ago to 98,000 at present.

The association’s main message is to tell its members to invest for the long term, partly as a way of avoiding brokerage fees. But the strategy is also to avoid the short-term performance goals that sometimes pressure big institutions to dump good stocks that don’t move up quickly.

Small investors can buy riskier small-company shares and hold them for long-term growth prospects, the group maintains.

The association sponsors investment seminars and puts out a sophisticated monthly magazine, included in the $45 membership. Articles in the recent issue covered such topics as: “Inflation and the Stock Market,” “Low Price-to-Equity Investing” and “Tax Exempt Investing.”

The bottom-line message in all of the articles seems to be similar to Feinstein’s lesson from a lifetime of investing--that patience pays off.

“Over the long term, the stock market has been good to me,” Feinstein said. “I’m confident that it can make a comeback pretty fast.”