What Small-Investor Spurt May Mean
Small investors are back in the stock market in a big way, and their hunger to own shares now is as great as at any time since the early 1970s.
But on Wall Street, many pros watching this trend don’t know whether to cheer or cry.
In Orlando, Fla., last weekend, a record 4,500 people turned out for the 42nd annual Investors Congress and Expo sponsored by the National Assn. of Investors Corp., an umbrella group for local investment clubs nationwide.
Membership in NAIC clubs has rocketed by 30,000 the past year to 172,421, the highest since 1973. It’s one of the most telling barometers of the average person’s interest in stocks, because club membership gives small investors the opportunity to research, discuss and buy individual stocks by pooling efforts and money. NAIC now has 8,425 clubs across the country.
Instead of welcoming this individual-led buying surge, however, many analysts see the newcomers as gate-crashers: Their presence means that the bull market party is almost over, some say.
The negative view of heavy small-investor activity in stocks stems from the historic image of individuals as mostly ignorant, hapless investors, prone to buying at market tops and selling at market bottoms.
But some Wall Streeters say that image is at best overwrought and at worst an out-and-out lie. The fact that more people want to own stocks isn’t necessarily a sign that the market is peaking--or that individuals will have less success with their money in the ‘90s than big investors, some analysts say.
To be sure, the numbers suggest that small investors are virtually mobbing the stock market today, understandably worrisome to anyone who fears crowds:
- Net cash flow into stock mutual funds so far this year has reached a record $54 billion, already topping the full-year $38.3 billion in 1991. The last time cash flow surged so dramatically was in 1986-87, when small investors threw more than $40 billion into stock funds--that is, until the market crashed in October, 1987.
- Federal Reserve statistics show small investors on track to wind up 1992 having bought more individual stocks than they sold, something that hasn’t happened since 1976. Throughout the ‘80s the average investor consistently liquidated individual stock holdings, favoring instead the diversified approach of mutual funds. Now, ownership of specific stocks is back in vogue--as NAIC’s booming membership rolls attest.
Yet the NAIC numbers raise a haunting memory: The clubs’ all-time high membership was about 200,000 in 1973--just as the stock market began a two-year-long bear market that saw the Dow Jones industrial average plunge 45%, from a high of 1,051 to a trough of 577.
The small investor’s defenders don’t argue the idea that another bear market is out there somewhere, or that many people will be hurt when it comes. What they reject is the notion that individuals’ renewed interest in stocks is fleeting, and that the current wave of buying represents a 1973-type generational peak.
The message of the small investor’s return, say some analysts, is simply: Get used to it--there are good reasons why people are buying stocks again, and those reasons won’t disappear soon. Moreover, that buying power could provide major support for the market in times of stress in the ‘90s.
Laszlo Birinyi, who heads the research firm Birinyi Associates on Wall Street, notes that the stock market is shaped by two kinds of forces: cyclical (short-term) and secular (long-term). The economy’s ups and downs produce cyclical swings in investors’ attitude toward stocks. But other factors determine the secular trend--that is, whether stocks make up a greater or lesser percentage of investors’ assets over time.
After shying away from stocks for most of the ‘70s and ‘80s, “I think we’re seeing a secular return by individuals,” Birinyi says.
Low interest rates have helped fuel the buying explosion, of course, by encouraging people to leave safe bank accounts in search of higher returns elsewhere.
But other powerful influences also are driving individuals to stocks, experts note: the aging of the population, producing a greater urgency to invest funds for retirement; the faded prospects of real estate as a long-term wealth-builder; and perhaps most important, the increasing confidence that many individuals exhibit in managing their own money.
Indeed, while in Wall Street lore the individual is pictured as forever bungling investment choices, the evidence suggests otherwise. “Their timing swings in recent years have been very good,” says Arnold Kaufman, editor of Standard & Poor’s Outlook market newsletter in New York.
In the high inflation era of the late 1970s, for example, many individuals correctly saw real estate as a smarter investment than stocks; the market went nowhere while home prices soared. In the late 1980s, as takeover mania sent many stocks to absurd heights, small investors continued to liquidate individual stock holdings in favor of the diversified approach of stock mutual funds.
And while most institutional investors have struggled--and failed--to construct winning stock portfolios since the 1987 market crash, the NAIC says more than 60% of its investment clubs report matching or beating the benchmark S&P; 500 stock index in 1990, 1991 and so far this year.
Privately, some Wall Streeters question those numbers. But then, it isn’t in the pros’ interest to admit that individuals are capable of becoming good investors without help from so-called experts.
“I think institutional investors have had to invent this idea of the ‘dumb individual’--otherwise, why would anyone pay for professional management?” asks Don Phillips, a principal at mutual-fund tracker Morningstar Inc. in Chicago.
Ken Janke Sr., president of NAIC’s board of trustees in Royal Oak, Mich., says the clubs’ collective success in recent years is mostly a function of members’ painstaking approach to investing: They take time to decide which stocks they want to own, and then stick with them--even in volatile markets--unless and until the company story changes.
That kind of “watchful patience” is a time-honored formula for success on Wall Street, Janke notes, and it has become almost exclusively the approach of small investors. Most institutional investors, pressured by clients to try to beat the market each quarter, have all but forsaken the concept of true long-term investing, he says.
So while bearish analysts argue that stocks have increasingly gone from “strong hands” (the allegedly savvy institutions) to “weak hands” (the allegedly panic-prone individual) this year, Janke suggests that the reverse is true. Selling to a longer-term investor, he says, “would be my definition of having a stock in strong hands.”
Still, some Wall Street veterans worry that individual investors as a group are being given too much credit. No doubt some people are smarter investors than 10 years ago, the bears say, but in all likelihood the large crowd of new investors will include many naive buyers picking the wrong stocks at the wrong time.
Steve Leuthold, whose Minneapolis-based Leuthold Group market research firm has the ear of many big investors, admits that it’s conceivable that the return of the individual to stocks is just beginning.
But he also notes that public buying this year has been huge even as stock prices hover at historically high levels versus earnings. That has usually been a recipe for trouble.
“I would say the public enthusiasm for stocks today is more indicative of a major top than something that will be going on for the next decade,” Leuthold says. “There really has been a public stampede into equities. The question is, how much is too much?”
