So, we got it all wrong. We thought that the individual investor would storm the ramparts, manage the money himself and take over the world. I, in particular, as a founder of TheStreet.com, thought that we could turn Wall Street into a Home Depot, where the do-it-yourselfers could roam free, taking care of their own money and building up colossal nest eggs all by themselves. We ended up costing people fortunes with articles, newscasts and advertising about how simple it was. The best of us were naive, and the worst of us were self-serving and shameful.
How naked with rapacious greed were we in the face of the neophyte investor back in the day? Let me give you an example. Remember those ads where the kid showed the boss how easy it was to invest? The ones where he was busy buying stocks online while the boss was clueless? How about this for irony: The callow youth, Stuart, was showing the grizzled senior how easy it was to buy Kmart. Oh, not the Kmart that merged with Sears and turned out to be Canaan in disguise. But the Kmart that wilted in the Sinai Desert, the Kmart that went out at zero and lost you everything. A nice metaphor for the moment. Just one of thousands of examples where we told people that if you buy it, it will go up.
What Went Wrong
What did we do wrong? And what have retail investors — your clients — learned? First let's nail the mistakes from the last time around.
Newbies got sucked in by the Web. The neophyte investor loved the seductive way the Internet allowed him to get in, and, with a keystroke, buy — cheaply — any stock he liked just like he was buying a product. I like to think that what the investor did was “vote” for a stock more than invest in one. If someone was shooting gerbils out of a cannon in an ad, you voted for that stock by buying it; the stock usually became worthless shortly thereafter. If you liked the experience of having your food delivered, you bought Webvan stock at $35, then watched it drop to zero. Found a cool Web site? You took down stock in it regardless of the financials, regardless of the fundamentals and regardless of the twisted metrics then in vogue. Remember eyeballs? How much money was lost buying stocks with lots of eyeballs? It is like we all became optometrists, for heaven's sake. Brokerage houses abetted this kind of logic with research that was paid for by investment banking. At least the travesty of critics being paid by the moviemakers has been banned, thanks to Eliot Spitzer. But the damage was inflicted.
It wasn't bad enough that the research from the big houses was corrupt. The research from the e-brokers consisted of “tools”; tools that got you nowhere, by the way. These firms, desperate to offer some sort of reason to choose them over another online broker, advertised their charts and graphs as some sort of stockpicking program. To this seasoned stock player, those tools told you nothing, nothing at all. These firms misled the public into thinking that these charts/graphs/tea leaves would really help people invest. What nonsense, but it still continues to this day.
We were brainwashed. A curious mixture of Warren Buffett buy-and-hold, Peter Lynch buy-what-you-like and “It is a sin to pay the taxman” sentiment coalesced into strategies that produced disastrous results.
During the heyday, we had a massive number of IPOs. The newbies had no idea how to handle this onslaught of new merchandise. I ought to know: I fought frantically with Goldman Sachs, TheStreet.com's banker, to open TSCM in the $20s. Goldman's over-the-counter desk said it was helpless in the face of the wave of public orders. I heard $30s, then $40s, then $50s as potential handles on the price. Ultimately, the stock opened at $63, moved up to $70 — a delicious price to sell at, not that anyone did — and then proceeded to go to $1 almost in a straight line. I am still hated for this disaster of an opening that I, and my company, had nothing to do with.
When things went bad and all the bull market geniuses became bear market morons, they had no time or inclination to find out what the heck they owned. Did they start doing real homework? Nah. They simply stopped looking. And when things finally bottomed out in 2001, they sold the Yahoos and the Cornings and the Quests at lifetime lows. Check out the charts if you don't know what I am talking about.
When pointing fingers, how about the media as cheerleaders? Yes, we all got caught up. I know I got caught up — but last I looked I was the only one to own up to that role. I gave a fabled and much-criticized speech about the Winners of the New World near the end of the great bull market. The speech was full of a lot of information that had no shelf life a year later. I have been castigated ever since by some. But, in my defense, it didn't matter that I later told people on TheStreet.com's site that I was going into bonds — first time ever — because the damage had been done. Nobody heard that cry.
Finally, the public never even knew what homework was. At the same time the Web offered access to all sorts of data I couldn't get at Goldman Sachs in the 1980s — even with every librarian pulling for me — no one told the public how to use the newfound information. You could see the balance sheet, but what's a balance sheet? You could read the 10-K, but what's a 10-K? What do you listen for in a conference call? What's an upside surprise? All of this stuff, the fundamentals of homework, left people shaking their heads with the language of Wall Street gibberish.
Meet the New Retail Investor
But what can the new, younger generation of investors learn from what went wrong without experiencing it themselves? Here are the lessons they should take to heart.
First, buy-and-hold has been replaced by buy-and-homework. In my many venues I see people actually going to the Web and learning how the game works. They are savvier. They know what to do to protect themselves.
Second, I am seeing people recognize that taking profits is not a sin. Some people actually know to sell as stocks get more expensive and buy as they get cheaper. I am not being facetious. People are beginning to see — by doing their homework, through listening to the conference calls and reading the research and paying attention to directional products — that stocks diverge from the companies underneath them and that's where the opportunity lurks on both the buy and the sell side. They recognize the value of buying a best-of-breed stock, not the fly-by-night that can make them quick money. They recognize that a better time frame than overnight might be six to 18 months.
Third, people have begun to know their own limitations. They know that if they don't have the time or the inclination to invest for themselves, it is not a sin to invest in a well-performing mutual fund or to see a responsible registered representative. Plus, individuals with some money now have access to hedge funds, so they can have pros go short or bet against the market for them. No longer do people feel that they are being stupid if they don't do it themselves.
Fourth, if they choose to self-direct, they are doing it with their eyes open and with some knowledge of what they really want in stocks. They now prefer to talk over the process and the picks with a human before buying. They have recognized that if they can't explain the stock to someone, they shouldn't buy it. They are no longer fixated just on technology. They recognize that diversification is not the enemy of outperformance, but the delightful and thoughtful cushion against the inevitable hard times.
Fifth, they aren't borrowing as much to buy stocks. Sure, the margin figures are higher than they have been since the top in 2000, but as a percentage of net worth they are a fraction of what they have been. Margin is not a problem yet, and after the vicious Spring sell-off, it is likely not to be a problem for some time.
Finally, they understand to be skeptical, not to trust blindly in managements, not to trust blindly in companies and not to trust blindly in Wall Street. They recognize that they are swimming with the sharks when they leave cash and buy stocks, and that if they can't keep up with the stocks they own, they have to give that responsibility to someone else.
None of this is to say that the public won't lose money in the game again. We know there are no guarantees when you buy a stock. These aren't vacuum cleaners you can return for your money back. They aren't risk-free like cash. But it is to say that this time, if there are losses, they are fair-and-square losses and no more than that. At last the public has a fighting chance to make money. Maybe that, and the prospects of being on par, at last, with the big boys, is what is drawing people back, as it should, to the greatest game on earth, the stock market.
I, for one, think that the mistakes of the past won't resurface with the new investors. They are sober, they know our business and they actually enjoy the process without being reckless. They are a fabulous new group; let's protect them from rapacious stock merchants at all costs.