'Get Rich Quicker' Is the Message, and It's Getting Through

By TOM PETRUNO

April 11, 1999 12 AM PT

Amid wild market volatility, disappointing mutual fund returns and the rise of online brokerages, more Americans are forsaking long-term stock investing for other strategies--including active trading and a shift of capital to other, safer assets. The challenge to the ‘buy-and-hold’ mind-set is growing, as this three-part report explains

According to Madison Avenue, here are some of the investing truths Americans should now hold to be self-evident:

* People who use discount brokerages can, in a reasonable time, expect to be successful enough to buy their own islands in exotic places.

* No full-service stock broker could possibly have your best interests in mind and, on the golf course with their buddies, such brokers have a laugh riot discussing why clients are dumb enough to do business with them.

* Hip investors actively trade stocks online and make great money doing it. Only losers or dimwits passively own mutual funds anymore.

These are the images one takes away from the current crop of TV ads for discount and online brokerages that are blitzing the airwaves. If you haven’t seen one of these ads yet, you will.

The universal message is clear enough: Do it yourself, Mr. and Ms. Investor, and you’ll be happier, more fulfilled and--of course--a lot richer.

You’ve got to be in the market and you’ve got to be able to move fast. But you can’t trust anyone else’s instincts--and why would you need to, with your discount broker, and the Internet, offering you all the necessary tools, information and trading speed?

Are they getting through to us? Apparently. Trading of individual stocks by small investors has exploded over the last few quarters. At Charles Schwab alone--the biggest discount and online broker--daily average trades totaled 167,500 in the first two months of this year, up 103% from the 1998 period.

It’s not for nothing that stocks of such online firms as Ameritrade Holding, E-Trade Group and National Discount Brokers all rocketed to new highs last week.

Contrary to what the brokerages might wish, however, we have not become a nation of traders. Not yet, anyway. The surge in trading by individuals is occurring at the market’s fringe, and in a relative handful of stocks--mainly Internet-related issues.

Still, extrapolate this trend and the implications get interesting to say the least.

If active trading is on the rise, and buy-and-hold investing is on the wane, the capital-raising function of markets becomes much more dicey for companies that aren’t part of the hot trend du jour.

Already this year, many investment bankers have been shocked by the poor receptions for new stock offerings that don’t include a dot.com in the name.

Korn/Ferry International, a veteran, profitable executive search firm, went public at $14 a share in February, and promptly fell as low as $11.

Contrast that experience with the reception for the latest new batch of Internet stocks on Friday. One of those new issues, from a start-up company called USInternetworking, soared from $21 to $57.50 by Friday’s close. No earnings? No problem! One can confidently assume that few investors who bought this stock on Friday were planning to hold it very long--maybe a matter of minutes.

The extraordinary volatility of the Internet issues also raises big questions about overall market volatility in the long run. Will the continuing growth in online trading accounts, along with what is already a trigger-finger mentality on the part of many professional fund managers, turn our market into something closer to those of Third World nations?

The faster a market moves, after all, the more it feeds on itself. The risk is that nearly everybody gets a trigger finger--especially when a stock begins to tumble. If you’re the last one out in a bad market that moves at light speed, your losses may be horrific.

Note that we haven’t yet addressed the question of whether active trading, as a strategy, is one that most people (amateur or professional) can apply successfully. Despite the very entertaining TV ads that brokerages such as Ameritrade and Morgan Stanley Dean Witter Discover have playing these days, managing money is a tough game--and active trading is tougher still.

Maybe this is a good point at which to stop and draw some distinctions. Nobody is arguing that the rising number of individuals who can trade stocks online is, by itself, a bad thing.

Just because someone opens an online brokerage account doesn’t mean that person automatically becomes a day trader or abandons a buy-and-hold investing philosophy.

John Markese, president of the Chicago-based American Assn. of Individual Investors--a group that has long championed fundamental stock research and a long-term view of things--believes that his members, typically, “are trading more. But they aren’t day-trading.”

Even if more investors mull the idea of active trading, Markese says, “it just doesn’t fit most people’s strengths to sit and monitor short-term market moves all day.”

By the same token, the resources and information available to investors online offer a tremendous advantage that didn’t exist before the Internet. Once you have access to the Net, you’ll probably never give it up.

But does the ability to trade actively mean more people will do so, over time--whether or not it truly benefits them and the long-term growth of their assets?

Jack Brennan, chairman of mutual fund giant Vanguard Group, argues that the current explosion of trading by individuals is “a fad that will come and go.”

He expects to see less of it in three years, he says, and a renewed focus on long-term investing within a diversified portfolio.

For one thing, Brennan says, active trading “only works in an up market,” which is, of course, what the Internet-related stock sector has been--with a vengeance--since last summer.

In a flat or declining market, he says, the appeal of trading will decline dramatically for most market players.

But that may be oversimplifying. The greatest up market today is in blue-chip stocks, including leading technology names. Yet while many people are trading those issues, for many more investors those stocks are not trades at all, but rather are viewed as the perfect buy-and-hold investments for the long haul.

By contrast, many small-stock mutual funds, after a year of miserable performance, are seeing investors trade out of them despite pleas by portfolio managers that the stocks are horrendously undervalued and that the smart move would be to stay put.

The ease with which fund investors can move their money today and the general lack of patience with poor investment returns (especially when viewed against the mega-returns in the Net stock sector) have led to a surge in fund redemptions over the last year, as my colleague Paul J. Lim chronicles in an accompanying story.

We in the media are part of the problem, on one level. The Times, for example, publishes a special section each quarter detailing mutual fund performance. The most recent such section was published last Tuesday. In it, we listed page after page of fund “star” rankings as determined by fund tracker Morningstar Inc.

Naturally, if you’re in the best-looking funds, you feel great. If you’re not, you may wonder whether you’ve made a mistake with the funds you’ve picked, and whether it’s time to dump them--even though they may be only temporarily out of favor.

This debate inevitably raises a much larger question: Even if you believe in holding investments for the long term, doesn’t every investment, at some point, become a sell?

Peter Lynch, the legendary Fidelity manager, bought a lot of stocks--and sold a lot too. Even Warren Buffett has gotten rid of some things over time.

To AAII’s Markese, buy-and-hold doesn’t mean shackling yourself to your investments for life. “What buy-and-hold means is you’re not a market timer, and you’re giving things time” to prove themselves, he says. “You’re [allowing] time for good things to happen, not trading price moves.”

But will that mentality increasingly be under siege in a world where time seems ever more compressed--and where, if we can do something (e.g., trade investments more actively), we usually will?

Maybe, like so many things in Western society, this will all come down to the marketing. Right now, the marketing of online trading, and active trading in general, is bringing thousands of new customers to major discount brokerages every week.

One of the most entertaining new ads from an online firm is Ameritrade’s TV commercial featuring two female friends who rush home so that the financially savvy one (we quickly understand that one is savvy and one is not) can check a stock online.

She logs on to her computer, and--boom!--she’s got a great gain in this stock. Boom! She sells it and makes a tidy profit.

Her un-savvy, ditsy friend has no clue what’s going on. Searching for something smart to say, the un-savvy friend announces with innocent pride that there’s something she’s never told her pal: “I own mutual funds!”

I asked Peter Horst, the vice president of marketing for Ameritrade in Omaha, if one message in the ad is that only losers buy and hold mutual funds.

“That’s not our intent,” he said. “The real intent is to have a little bit of fun. The point is, this person is not very sophisticated, but she’s proud of something she’s done” with her money.

Um, OK.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

At Schwab, the Real Action Is in Trading Stocks

Charles Schwab, the largest discount and online brokerage, has seen the growth of trading via its OneSource mutual fund supermarket slow in recent years. But individual stock trades have mushroomed since 1997--and in the first two months of this year were double the year-earlier pace.

Mutual fund trades at Schwab

Daily averages each year and in first two months of 1999, in thousands:

‘99: 52,600

Stock trades at Schwab

Daily average revenue trades each year and in first two months of 1999, in thousands:

‘99: 167,500

Source: Charles Schwab & Co.

Stock Fund Inflows Slow . . .

Net cash inflows (purchases less redemptions and exchanges) each year and annualized pace of inflows in January and February of this year (billions of dollars):

‘99: $107.4*

*Annualized rate for first two months

. . . as Redemptions Surge

Gross redemptions of stock mutual fund shares by investors each year and annualized pace of redemptions in January and February of this year (billions of dollars):

‘99: $743.4*

Source: Investment Company Institute

How Much Is Enough?

The spectacular bull market has swelled the value of the U.S. stock market nearly threefoldsince 1990, making stocks a higher percentage of Americans’ total household assets todaythan ever before. But for some investors, that may be a signal to stop holding so much stockand take some profits off the table.

Value of U.S. market

As measured by Wilshire 5,000 index, in trillions of dollars:

‘99: $12.2 trillion

Distribution of U.S. household wealth

1980:

Tangible assets*: 39.9%

Stocks: 10.2%

Bank deposits: 13.9%

Bonds: 3.9%

Other assets**: 32.1%

1998:

Tangible assets*: 30%