Image Credit: Christophe Vorlet
By Jason Zweig | Jan. 22, 2011 12:01 a.m. ET
Here come the sheep, just in time to be shorn.
That has been the refrain on Wall Street this week, as the latest figures showed that retail investors put $3.8 billion more into U.S. stock mutual funds than they took out in the week of Jan. 12. Meanwhile, the Dow Jones Industrial Average rose for the eighth week in a row, raising concerns that the market is overheating.
“You’re starting to see the retail investor pile into stocks now that the market has nearly doubled,” says David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto. “Is it a classic sell signal? The answer is unequivocally yes.”
Hedge funds and other professional traders, having loaded up on U.S. equities with cheap cash pumped into the economy by the Federal Reserve, would like nothing more than to dump their positions onto the “dumb money” and call it a year.
But a closer look at the numbers shows that, instead of plunging back into stocks with both feet, the small investor appears to be dipping in only the first knuckle of one pinky toe. Those who are betting on more may end up disappointed.
While the recent $3.8 billion was the biggest weekly flow into mutual funds since May 2009, it added just 0.09% to the total assets of U.S. stock funds. Last year, investors yanked out roughly $35 billion more than they put into U.S. stock mutual and exchange-traded funds combined.
What’s more, fund purchases normally take a jump in January. In 2006, according to TrimTabs Investment Research, 72% of all the new money that came into U.S. stock funds arrived in January. In both 2009 and 2010, more than $6.8 billion flowed into U.S. stock funds in January. Still, a total of $109 billion gushed back out during the two years.
For millions of Americans, spare cash is a lot scarcer than it was in the days when unemployment ran at 6% and home-equity loans made houses ring like cash registers. “Those [money managers] who have been buying are looking for the greater fool to take them out, and the greater fool has always been the little guy,” says Charles Biderman, TrimTabs’ chief executive. “But maybe the little guy doesn’t have the money this time to play the greater fool.”
It has been ages since stocks nearly doubled and investors didn’t give a darn. In early 1948 — nearly two decades after the Crash of 1929 — the Federal Reserve surveyed 3,500 investors nationwide about their attitudes toward stocks. Only 5% were willing to invest in equities, and 62% were opposed. Asked why, 26% said stocks were “not safe” or “a gamble.” Just 4% felt that stocks offered a “satisfactory” return.
Even after stocks had doubled over the preceding five years, the wounds of the Great Crash still hadn’t healed.
It could be a long slog, again, before today’s small investors forgive the market for the pain it inflicted on them. After the 2008-09 bear market and the flash crash of May 6, 2010, when the Dow dropped 583 points in roughly five minutes, “a lot of people have said, ‘Never again,'” says Morningstar analyst Kevin McDevitt.
James Elder, 63, an executive at a wholesale lumber supplier in Opelousas, La., is one. “The last two or three years have exposed that for the small investor, the game is totally rigged,” Mr. Elder says. “You expect that in a casino, but at least in a casino you know the odds. In the stock market now [after the “flash crash”], you don’t even know the odds.”
Mr. Elder, who kept about half his assets in stocks until 2008, has only 10% left in equities. “I don’t plan on ever going back and putting as much into stocks,” he says.
Even without a stampede of individual investors, the stock market can get overstretched. The market boomed in the late 1940s and early 1950s without the little guy. Only in the mid-1950s, as one of the biggest bull markets in history roared ahead, did individuals return to stocks in earnest. By then stocks were roughly twice as expensive as they had been when individual investors told the Fed they were a “gamble.”
“When is the last time you heard somebody say, ‘Any dip in the stock market is a buying opportunity’?” asks Meir Statman, a finance professor at Santa Clara University.
Perhaps the so-called smart money shouldn’t be too smug in assuming that small investors are ready to play the patsy again anytime soon.
Who, then, will buy from the sellers? That question should worry bulls and bears alike.
Source: The Wall Street Journal, https://www.wsj.com/articles/SB10001424052748704115404576096060508814434
Resources:
Federal Reserve Board, 1948 Survey of Consumer Finances
Definitions of INDIVIDUAL INVESTOR, RETAIL INVESTOR, SMART MONEY and SOPHISTICATED INVESTOR in The Devil’s Financial Dictionary
Chapter Nine, “Regret,” in Your Money and Your Brain
Chapter 17, “Losers and Winners: Poor Grenville, Charley, and the Kids,” in ‘Adam Smith,’ The Money Game
Ulrike Malmendier and Stefan Nagel, “Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?”
Michal Ann Strahilevitz et al., “Once Burned, Twice Shy: How Naive Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold”