Small Investors Take Long-Term View
If only the National Enquirer gave a hoot about the stock market, it might headline a story about the latest panic like so:
Little People in Death Battle With Fat-Cat Money Goliaths!
As stocks continue to plunge, individual investors continue to pour into the market, convinced that this is a great opportunity to buy.
Meanwhile, many big investors--pension funds, independent money managers, mutual funds--are selling, either because they suddenly see severe economic trouble ahead, or simply because they want to escape 1991 with at least some of their hard-won paper profits.
In Monday’s rally, individual investors were a major factor. And in Tuesday’s renewed plunge, individuals also provided a big cushion for the market. The evidence:
* Fidelity Investments’ discount brokerage operation said 62% of its customers’ transactions on Tuesday were buy orders, despite a harrowing session that saw the Dow Jones industrials fall nearly 80 points by midday.
* The T. Rowe Price mutual fund firm in Baltimore said two-thirds of the trades it recorded on Tuesday were exchanges out of money market funds and into stock funds.
* Both the 20th Century mutual funds in Kansas City, Mo., and the Financial Funds in Denver received a record number of calls from investors on Monday. The vast majority wanted to buy stock funds.
Do Mr. and Ms. America really know what they’re doing, buying into this turmoil? You may recall that old-line market wisdom: By the time the individual is fighting to get into the stock market, the game must be over.
That might be true--if indeed investors were crazy-hungry for stocks, says John Markese, who directs the Chicago-based American Assn. of Individual Investors. But he argues that small investors’ move into stocks this week--and in fact, all year--has not been the wild-eyed panic that typically accompanies market tops. Rather, individuals are thinking very rationally about what they’re doing and why, Markese contends.
“In 1987, people were desperate if they had $10 left that wasn’t in the stock market,” he says. Now, he says, “I see a lot of people who are interested in the market, and they’re planning to get in--but they’re a very cautious lot.”
The AAII, which has more than 100,000 members, regularly holds investment seminars across the country. Attendance at those seminars has been up 50% to 60% this year at most locations, Markese says. In discussions with investors at those meetings, he says, people explain very soberly why they’re interested in stocks and how they intend to buy.
The “why” in the equation often is a growing realization that the value of single-family homes--most individuals’ biggest investment--may grow slowly or hardly at all in the 1990s. So people want to diversify into other investments, Markese says.
At the same time, he believes that most individuals have no illusions about the risk in the stock market, especially in the short term. “I’d say people have learned a lot over the past five years,” Markese says. When they talk about making money in stocks, he says, the focus is on “five-year time horizons and 10-year time horizons. And they want to get in slowly. “
Now, contrast that approach with what’s on the minds of most institutional investors. They’ve made a lot of money in stocks this year, on paper. They’re afraid that if Dec. 31 arrives and all of those beautiful capital gains have evaporated, their clients will be livid. It’s a sad fact that short-term performance is paramount in the highly competitive business of money management.
So as worries grow that the economy is still mired in recession, the pressure on institutions to sell out of stocks is mounting by the minute. “They’re even more risk-averse than normal right now,” says William Dudley, financial economist at brokerage Goldman, Sachs & Co. in New York.
Small investors versus large investors. Long-term thinking versus short-term thinking. Who’s got it right this time?
Institutions still control the market--they account for 60% or more of trading on any given day. So it’s almost a sure bet that they can and will take stocks sharply lower over the next few weeks, if pessimism about the economy deepens.
You wonder, then, why individual investors don’t simply wait to buy. After all, there’s no guarantee that last Friday’s 120.31-point Dow plunge was the culmination of something, as was the case in the one-day crashes of 1987 and 1989. Friday may just have been the start of a significant market setback, if President Bush and Congress don’t get their acts together on the economy.
Markese believes that many individuals understand that. They’re buying, he says, with the idea of easing into whatever lies ahead. Put in a little money now, wait, and put in some more. And remember that you’re looking ahead five years.
Sound too simple? Too logical? Maybe too darn hopeful? Give the individual investor a little more credit, Markese suggests. If this recipe of patience and cautious optimism is all they know, maybe it’s because over the long run it has actually worked.
The Selloff So Far How key stock indexes have fallen from their 1991 peaks so far:
1991 Tues. Pct. Index peak close change Dow utilities 220.89 213.63 -3.3% NYSE composite 219.37 209.91 -4.3% S&P; 500 397.41 379.42 -4.5% Wilshire 5,000 3,862.46 3,684.74 -4.6% AmEx market value 392.37 374.25 -4.6% Dow industrials 3,077.15 2,931.57 -4.7% NASDAQ composite 556.17 523.47 -5.9% NASDAQ industrials 629.76 588.53 -6.5% Dow transports 1,287.56 1,200.11 -6.8%
Market Gyrations: Never the Same Pattern A look at the violent stock market spasms in 1987, 1989 and the past week’s turmoil:
1987 What Happened A five-year rally in stocks reaches a crescendo in late August, and the market starts getting nervous over the weak dollar and a rise in interest rates. On Friday, Oct. 16, the Dow Jones industrial average falls 108.35 points. The following Monday, the Dow plunges 508 points, or 22.6%. It is the market’s worst day ever. Why
Economic uncertainty, speculative excesses and panicky selling are blamed, aggravated by a lack of coordination between markets and heavy use of computerized trading.
What Was Done
The New York Stock Exchange and other markets, fearful of more regulation, establish better coordination and emergency “circuit breakers” to limit volatility. 1989 What Happened
After a long run-up, the Dow tumbles 190.58 points on Friday, Oct. 13. But the market rallies the following Monday, with the Dow recouping 88.12 points. Why
The catalyst for the drop is the collapse of an employee effort to buy the parent company of United Airlines, seen as a signal that investor appetite is over for debt-financed takeovers, a major source of the market’s strength. The spasm resurrects concern over the fragility of markets.
What Was Done
The SEC is given the authority to restrict some computerized trading and shut the markets in emergencies. 1991 What Happened
The market rises to record highs over the summer and fall, but concern grows that stocks are overpriced given the economy’s anemic condition. On Friday, Nov. 15, the Dow tumbles 120.31 points. The market partly recovers on Monday, but on Tuesday, the market takes another precipitous drop, with the Dow losing almost 80 points before rebounding late to close off 41.15 points at 2,931.57. Why
Doubts about the Bush Administration’s ability to stimulate the economy are largely to blame. Many experts also cite a congressional proposal to cap credit-card interest rates. What Is Being Done
Administration officials and lawmakers, alarmed by the stock market’s violent message of protest, back away from the credit-card cap legislation and seek to assure the financial world that any economic stimulants will be considered carefully.
Tuesday’s Wild Session Dow industrial average on the quarter hour Tuesday close: 2,931.57 down 41.15
