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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 Ferdinand Pecora and FDR and the newborn Securities and Exchange Commission flushed out the Street in the 1930s. It was true in the long bull markets of Eisenhower and Reagan. And it is still true.
The era we invest in today, however, is as good as any 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’s returns had been disputed.)
Following Darvas’s 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 & Co. 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.
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 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 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.)
Commissions probably ate up 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 probably 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 cost than institutions. 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 or ETFs, 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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My first job was financial analyst for a second tier bank on a non money center city. We had phones with which to talk to NYC long distance (ti lines, as I recall) an a library with a librarian and 6′ high steel shelves that filled a very large room. There were maybe ten of us writing reports for our employer’s use. I am CFA number 7 thousand something.
Today there are 100 thousand people sitting for the CFA exam EVERY YEAR, and the information kept at no small expense in our library is available times 500 for free virtually everywhere. Add to that the fact that transaction costs have dropped from high to basically nothing.
Nevertheless, the old maxim “What I know, you know, and everybody knows” is still true. I agree with the author at the end of the day.
I remember establishing an account with “Muriel Seibert” to get discounted trading commissions for my $2,000 portfolio (!). And yes, my girlfriend and I watched WSWeek every Friday evening before our “dates”. . Hard to believe there was a world before Vanguard, Fidelity, T.Rowe, etc.
“Now is always the toughest time to invest” +1
Now is always the toughest time to invest
IF you did not invest in the 70′s you can’t relate. Add Wall Street Week, fridays on PBS for research. No CNBC or FOX Business or I.B.D.. 5 % commissions slowed volatility. Risk & stress & procrastination kept many out of the market, then & now. Buy & Hold prevailed . Exotic pkg. products seldom considered. Jason shows quality established companies that earn & serve a broad demographic are still good investments even in these–again, uncertain times
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