3/1/2012 7:11 PM ET|
Is this a golden age for investors?
Trading fees have fallen nearly 90% in recent decades, and the market is actually less volatile than it has been in the past.
Tadas Viskanta at Abnormal Returns kicked a hornet's nest with a recent post arguing, "There has never been a better time to be an individual investor."
When I tweeted it, @aDaveNewWorld asked incredulously, "Do you really agree?"
You bet I do.
First of all, as Viskanta also pointed out, there was never a golden age when the financial markets were safe or when investors were always represented by people who behaved liked angels.
As I wrote in my 2005 introduction to Fred Schwed's classic book, "Where Are the Customers' Yachts?," the individual investor has always been "situated at the very bottom of the food chain, a speck of plankton afloat in a sea of predators."
That was true in Exchange Alley in London in 1720. It was true when A.L. Bleecker and John Pintard started auctioning stocks in their Wall Street coffee house in 1791. It was true after President Franklin Roosevelt, Ferdinand Pecora and the newborn Securities and Exchange Commission flushed out Wall Street in the 1930s. It was true in the long bull markets of Presidents Dwight Eisenhower and Ronald Reagan. And it is still true.
The era we invest in today, however, is as good as any that ever has been.
To see why, contrast it with the Wall Street of the 1970s.
I bought my first stock in 1976, when I was in 11th grade in rural upstate New York.
I had read a book called "How I Made $2,000,000 in the Stock Market" by a ballet dancer named Nicolas Darvas. His argument -- that surges in volume predict rises in price -- made sense to me when I was 16 or 17 and didn't know any better. (I also didn't know that Darvas' returns had been disputed.)
Following Darvas' methods as best I could, I spread out the stock tables of the Albany Times-Union on our living-room floor, closed my eyes and dropped a felt-tip marker randomly onto the pages 20 times. Then, for a month or so, I tracked the volume and the daily open, high, low and close of each of the 20 stocks on a separate sheet of graph paper.
After a few weeks, one of the stocks popped: "MacAF." After trading somewhere around $8 a share, it had suddenly gone on a tear, breaking $9 on much higher volume.
I wanted to buy 100 shares in the worst way.
My dad had an almost entirely idle brokerage account at Shearson Hammill in Hartford, Conn. A few times a decade, he bought or sold a stock. He had also wangled a monthly copy of Standard & Poor's stock guide -- just about the only objective source of information readily available to an individual investor at the time.
But the information was minimal.
The S&P Stock Guide gave me the company's full name -- MacAndrews & Forbes -- and rudimentary data about earnings, debt, assets and dividends.
The Stock Guide also showed that the conglomerate manufactured licorice, which sealed the deal as far as I was concerned.
In those days, if you wanted to learn anything else about a company, you had to spend hours in the public library -- in our case, a half-hour drive from home -- or write away for the annual report and wait weeks for it to arrive by mail.
By then, I was sure, MacAF would have quadrupled in price. I couldn't run the risk of waiting.
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Convinced that the only way I would learn from my folly was by losing my own money, my parents let me call their broker. I distinctly remember making the long-distance call (no toll-free numbers then!) with shaking hands. As I recall -- and bear in mind that some of my memories of this long-ago trade may have gone fuzzy -- I paid $9.375 apiece for my 100 shares, plus a commission of $50 or $60 (or 5% on the trade).
Over the next few weeks, the stock took off. Every day, I would check in the newspaper to see what it had done the day before. It rose past $10, then past $11. (Only many years afterward did I realize that I had stumbled onto the same little conglomerate that corporate raider Ron Perelman ended up using as his acquisition vehicle.)
As it rose, my broker suggested putting a stop-loss order on it, to sell me out of the stock if it fell below a certain price. MacAF kept climbing until the stop-loss was at $12.625. I was rich! In a few weeks, I had made 35% -- not counting commissions, of course.
And then, to my astonishment, an envelope came in the mail telling me that I had been sold out of my MacAF shares at $12.625 the previous week and that I would shortly be receiving a check for the proceeds -- minus another commission, of course.
I was astounded.
It turned out that MacAF had momentarily dropped below that price a few days earlier and I had been "stopped out." Because our newspaper had room only to show closing prices, I'd never known that the stock was sold out from under me in intraday trading.
Naturally, I bought it back immediately. I ended up selling it for good a few weeks later, around $14.25, I think. (If you can't be smart, be lucky.)
Commission costs ate up probably about 50% of my gross profit, leaving me with a net gain of $250 or so. That's not counting the numerous long-distance calls I made to our broker at a couple dollars a pop.
Research by Charles M. Jones of Columbia University and Kenneth R. French of Dartmouth College shows that the cost of investing has fallen by roughly 90% in the past few decades.
So has the aggravation. I still remember my anger at finding out, days after the fact, that I'd been sold out of a stock I wanted to own -- and then having to pay another commission to buy it back. The experience was so unpleasant that I didn't trade another stock for years, and I never again invested without mastering all the publicly available information about the company.
Something similar happened to many investors during the "flash crash" of May 6, 2010. But at least they found out right away, instead of having to wait almost a week even to learn that it had happened.
Many investors today are haunted by the sense that the markets are wildly volatile and have been hijacked by high-frequency traders who hold stocks for only fractions of a second.
While volatility is indisputably higher than its long-term average, it has been far worse in the past than it is today.
And the estimates that high-frequency traders account for 70% of total trading volume today differ little from the estimates of the Hughes Commission in 1908 that 75% to 90% of all stock trading in New York was "of the gambling type."
Meanwhile, the informational playing field has been leveled between individual and professional investors. Individuals can trade at lower costs than institutions can. Then again, you don't have to trade at all. Decades ago, a portfolio could easily have cost you 4% of your assets to assemble. Today, through index funds and exchange-traded funds, you can put a portfolio together at least 25 times more cheaply.
Yes, Wall Street is still a dangerous place. But it used to be worse.
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The article's thesis is very true. The overhead costs of investing have gone WAY down and made it accessible to a lot more people. That's good and bad.
Near real-time quotes and historical data from most any reputable online broker has levelled the playing field somewhat. In the old days the deck was really stacked against the small retail investor as the author has pointed out.
This should not be confused with the second point, which is attempting to time the markets. Should I get in @ at the DOW = 13,000 ? Good question. I look at it with trepidation. Think about it. We are only 10% off from our all time high in 2008, so if you think we have solved 90% of our economic problems, then go for it. If you think interest rates will remain at 0% for the foreseeable future, keep buying equities.
Someone answered my question very simply. The Obama administration has printed about 34% more money, and that is why the stock market is up by a similar percentage since he took office. With 0% interest rates, where do you think the money has to go?
If there was a level playing field, the average investor would have a chance to make some decent money. The cost are lower but the danger level is still very high. There are just too many issues involved.
It had to happen eventually. I finally read an article that I disagree with every single argument the author is making. Ironically, that makes it a keeper.
You're right, it does make it a keeper because I'm guessing you know little to nothing about investing.
Stock markets are full of risk as we all know , the last ten years were Flat and loss decade . However, the market is getting positive news this year . So, the overall market will head up
gradually in the next 2 years . Bonds maybe seeing a small gain
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