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Last week, we asked Inside Value members on the discussion boards why small investors are fleeing stocks in search of safer investments, as reported in The Wall Street Journal. Below, we've compiled some of their responses.
Jason Moser, Inside Value Analyst
I'm not surprised to read any of this at all. Roger Potyk's quote regarding the integrity of financial institutions was pretty heavy, and I'm sure one that is felt by a lot of individuals; particularly those who have been burned.
My father taught me about stocks at a young age, and thankfully, a lot of what he said stuck with me. Most of it was stuff like, "Buy things you can understand or are interested in," and that once you buy it, it's yours, and you should plan on keeping it indefinitely; it is money spent. I tend to buy stocks with the attitude that I will sell it whenever the price seems right. That could be tomorrow or never -- just depends.
However, I feel that one of the major advantages we have as individual "small" investors is time. We are not buying for a massive portfolio that we have to manage on behalf of thousands of nameless faces. We report to ourselves (and our loved ones), and that is basically it. Winning is a little more of a subjective thing, as it can be different for different folks.
There is no doubt that the last few years have presented more lessons than some investors ever learn in a lifetime, and I think that is really important to remember. I don't let this stuff scare me away from investing in stocks. I use it to make me a better investor. I am also looking at stocks much more closely now, paying particular attention to management and what they have done. I don't want to say I am skeptical, because I am not. But I also don't give the benefit of the doubt. The burden of proof is on the company to prove their case to me as to why I should feel comfortable buying the stock. If I cannot find it, I move on to the next one.
I also realize that I am younger than the "boomers", so my risk tolerance is probably somewhat higher due to this. Regardless, I think it is one of those things where I understand the perspective here, but I will continue to invest in stocks because I know that there are lots of good ones still out there.
Joe Magyer, Advisor, Inside Value
This piece was a nice reminder of a few fundamentals:
1. Diversify. The article notes a couple who got tagged with a major loss on a $75,000 position in a single Lehman Brothers bond. Unless these folks have a much larger portfolio than I'm assuming, that would be a hugely outsized position for them.
2. Don't pass up easy shots. Just because you're spooked by public markets doesn't mean you should pass up layups. For example, maxing out your Roth IRA contributions or your 401(k). If your 401(k) matches on, say, 1/2 of your contribution, you're looking at a 50% return on day one. Not a lot has to go right for you as an investor if you can snatch up such a quick, assured gain. Don't leave that money just sitting out there.
3. Be contrarian. I'll say this: I know of no investors who've built fortunes buying high and selling low, which is what these folks in this article seem to anchor on. Weak-kneed investors consistently shift from out-of-favor asset classes to those that have held up the best, which usually happen to rank among the most overheated. A large-scale example: When the tech bubble sent equity investors running into the arms of can't-miss real estate propositions. Or, currently, the folks bailing on stocks for the security of fixed income. Those folks'll come back to equities eventually, though probably after those of us who held steadfast made the "easy" money.
mjs111, Inside Value member
I think it's hard to avoid being weak-kneed if you're not running your own valuations on your holdings. I would be weak-kneed if I didn't have at least some logic and reasoning behind why I think a stock I bought at 1x and is now trading at 0.8x is still a good holding, and is likely a good place for even more money.
If you have no idea what the value is of an asset you are holding, all you see are prices going down or prices going up. You really have no idea whether or not you should be buying or selling. And I think this is where most retail investors stand, and I think they should be scared investing this way.
hondodog, Inside Value member
in a perverse way, i'm glad to see the negative market opinions dominating the media focus...i read this as a possible inflection point in the market....the volatility does allow good investment opportunities.
i find my best investment decisions happening not in a vacuum, but, with a certain amount of distance from crowd mania...today there is so much information available, that there is a rush to instant decision making.
the problem, from my perspective, is that there is then a rush to instant judgment on current events, that may have little or no impact on the intrinsic value of a company. i prefer a more deliberate process, reducing the adrenalin trade impulse in exchange for a better understanding of the buy/sell decision. i find that occasionally panic might have served me better, but on the whole, ignoring the temporary condition for the long term goal prevents sleepless nights fretting.
i think of my investing style a little bit like a horse wearing blinders to avoid being spooked from beside and behind, only looking forward...(an imperfect metaphor, as i invest more like a clydesdale than a quarterhorse...)
Rogene Calvet, Inside Value Home Team Member
What I gleaned from said article: Faith. Trust. Integrity. Market volatility. Cult following. Flight from risk. Simply put, it would appear to the retail investor this stock market operates outside their control.
Polls/ research of individual investors show persistent levels of skepticism about the outlook for stocks [Morningstar] and S&P. The Pros are buying.
Bloomberg BusinessWeek asks if such valuation tools as EVA and Market Topographer can surpass the traditional price-earnings ratio and finds two fairly new approaches available to retail investors worthy of note.
The first tool is EVA, well known here at the Fool.
For Fidelity investors, a stock rating system called PRVit—which stands for performance, risk, valuation investment technology and is pronounced "prove it"—uses the EVA methodology and has been available to institutional investors since 2005.
Developed by OCE Interactive, a New York firm formed by former investment bankers and Wall Street executives, web based Market Topographer takes an EVA-like approach by factoring capital costs, unrealized earnings capacity tied to fixed investment, stock price volatility, and nine other characteristics into stock valuations.
Skeptics argue that methodology isn't the issue when it comes to identifying mispriced stocks. "You've got to find some information that the market isn't incorporating into its price or its expected return," says Espen Eckbo, a finance professor at the Tuck School of Business at Dartmouth College.
Jack Rader, executive director of the Financial Management Association International in Tampa, Fla., an advocate of index investing for practical purposes says, "Most of us are not willing to do all the hard work." http://www.businessweek.com/investor/content/mar2010/pi20100326_198116.htm
IMHO, Professor Eckbo reinforces what is often said here at Inside Value, find information that the market isn't pricing in or to the expected return.
Does the retail investor matter?
Now another factor when looking to the retail investor for me is this. Does he really matter anymore? He is not as strong as in years gone by. Public securities are held by mutual funds, pension funds, and played with by the hedge funds rather than in the hands of private investors. Then there is the global bogeymen of world finance, the cyclical behaving sovereign wealth funds that are somewhat mysterious.
The upshot here is that the retail investor is not a priority to investment banks, the institutions are less of a hassle.
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The Fool owns shares of Morningstar, but no other Fool analyst owns shares. The Motley Fool has a disclosure policy.