Well, I dunno. Not all stocks are Lazarus, and not all lottery tickets win. Among the older generation of powerhouse stocks, some of them paid (General Electric, Intel) while others died (Zenith, Pan Am). “Hold for the long term,” as an answer to every investment question, is a mass delusion, too.
Many changes could strike the markets in the months and years ahead. For example, maybe double-digit growth has gone away. If so, you’ll have to save more money than you thought for college or retirement. I’ll bet you $10 and a dinner that today’s most-admired stocks won’t do as well in the future as the market overall. It’s time to look into stocks that haven’t been run up.
Momentum investing–buying into rising stock–will still be the mouse-clickers’ favorite game. But it’s likely to be harder to bid prices up. Newbie investors are getting burned in this Net- and tech-stock crash, and won’t be so willing to charge ahead. In the market, everything comes back–so you might bone up on value investing (buying stocks that have been beaten down).
Before I go forward, there’s one more delusion I want to mention–namely, that someone is to blame (I mean, other than the face you see in your mirror).
Phone calls and e-mails are pouring into the Securities and Exchange Commission, says Susan Wyderko, its director of investor education. The callers have lost serious money and they’re enraged–at TV analysts who praised a stock that tanked (“they secretly knew that it wasn’t any good”); at any public pessimist (“they fan the flames”); at unnamed Wall Street big boys (“hosing little guys, so that they can buy stocks cheap”). The losers want someone punished and their money back.
I agree that market touts, including the touts of the press, take advantage of credulous investors. On the other hand, you’re still responsible for yourself. “We tell people, over and over, to invest with their eyes open,” says a frustrated Wyderko. The SEC can’t help you, if you open them only to watch CNBC.
There’s one more designated culprit: Alan Greenspan, chair of the Federal Reserve. He’s raising short-term interest rates, to slow this hopped-up economy down. Consumer spending feeds the boom, and outsize stock-market gains have given investors extra money to blow. Your gains may all be on paper or tucked in your 401(k). But because they’re there, you feel free to save less, spend more and take higher credit-card and home-equity loans.
To fight inflation, the Fed needs spenders to scale back–and investors watch their budgets more closely when stocks decline. For this to work, however, it’s not enough for the market to fall just for a month or two. Stocks would have to be choppy, flat or (yikes!) falling for quite a while.
Right now, investors can’t imagine anything but a return of joy. “Confidence [in stocks] has never been so high,” says economist Robert Shiller, author of the fast-selling book, “Irrational Exuberance.” It’s positively quaint to think that stocks are unpredictable. Everyone “knows” what’s going to happen: prices have fallen, but they’ll soon run up again–to a point even higher than they were before.
Be it confidence, bungling or bravado, investors bought heavily into the market top. A record $122 billion poured into U.S. equity funds earlier this year. More than half went for funds that primarily hold high tech, according to AMG Data Services in Arcata, Calif.
They got hammered, of course. Tech funds fell 25 percent in the past four weeks. Some individual stocks are off 60 percent or more.
Undeterred, bargain hunters have been buying the dip. A fresh $8.4 billion surged into equity funds last week, including the techs. Internet funds are picking up new money too, despite (or because of) their 35 percent plunge over the past three weeks. Performance investors appear to be easing out of the S&P 500 index funds, in favor of managers who try to beat the market. Big-company growth funds copped the largest inflow they’ve seen in the past four years, says AMG’s Robert Adler. These funds are heavily in tech, but their managers buy other growth sectors, too.
As of last Friday most investors weren’t running scared–probably because they’re gambling with the house’s money. Tech funds are still ahead by an astounding 84 percent, compared with a year ago. Small-cap growth funds are up 60 percent. All U.S. equity funds are still up 22 percent. You’ve had a true loss, because your investment is down from its peak. But in your mind, the decline might not have bitten into your “real” capital.
Besides, you’re certain that the market will resume its helium ways. (Only grayheads remember the 17 years, 1966 to 1982, when the market zigzagged sideways, with no–zip, zero–net advance in the nation’s leading stocks.) At the RS Internet Age and Emerging Growth funds, a spokesperson says that investors generally don’t redeem during volatile markets, they watch and wait. From the New-Economy Munder funds comes the word that tough markets “separate serious, long-term investors from those who just want short-term results.” Again, that soothing goo–“long term.”
As for the point-and-click crowd, it hunted down “bargains” last week among its most beloved names: Microsoft, Intel, Cisco Systems. There’s even new respect for your grandfather’s growth stocks: General Electric, Coca-Cola, Merck, AIG.
But what is a bargain in stocks today? Traditional pricing measures vanished four years ago, at around 6000 on the Dow. Stocks are worth whatever you think the next guy will pay, with no general standard for what that ought to be.
What’s more, the traditional firms aren’t supplying as much liquidity to the market as they used to, says analyst Steven Leuthold of the Leuthold Group in Minneapolis. Just one small sell order can send prices down, even on big-name stocks, because no one steps up fast to buy. (The same thing happened in reverse, when the market bubbled up. But, hey, on the upside, we call it a “new era” price.)
Despite the sudden market rout, most economists think that business will stay on track. There’s no shortage of credit for most corporations, consumers and real-estate developers. Lending terms aren’t getting tough. Dot-coms without earnings find it hard to raise money now, but they’re on the bubble fringe. The Fed’s interest-rate increases haven’t yet put a dent in general financial conditions, says William Dudley, chief U.S. economist at Goldman Sachs. You’re not going to like it, but rates will have to rise some more.
This stock-market drop should actually give the Fed some help, says Irwin Kellner, economics professor at Hofstra University in Hempstead, N.Y. Most investors are still holding large enough gains to support a spending spree. But they’ll retrench, if a poor market nips their confidence. To slow stock-driven spending, it’s not enough to knock out the IPO and option wealth of the dot-com kids. The average investor has to start worrying that his funds, stocks and 401(k) might not grow at the pace he thought.
Here’s the best outcome, says Maureen Allyn, chief economist for Scudder Kemper Investments in New York: slower business growth, showing up this summer; dampened demand for homes; a looser job market, and for stocks, choppy prices for a while–not a crash, but not a recovery, either. By cooling the boom, we’d avoid a bust.
Of course, there’s always a risk that something might go wrong. For example, rising interest rates might uncover some unpayable debt which damages a financial system or institution. “Global debt is massive and opaque,” Allyn says. “You can’t tell who has what.” Just last week Alan Greenspan warned financial institutions not to expect a bailout except in the case of a crisis akin to a “100-year flood.” (By the way, it was Greenspan who saved you after the ‘87 crash.)
This brings me back to my starting point–the delusion of holding stocks for the long term. It doesn’t work the way you think.
Take the 34 leading growth stocks of 1980, identified by the New York investment firm Sanford C. Bernstein. Only one of them, Intel, remains a winner, says Alan Feld, managing director of Bernstein’s family-wealth group. Of the rest, 22 aren’t trading anymore (merged, bought, gone). The prices of the other 11 have trailed the S&P 500 stock average.
Nets and techs are an especially interesting question, because their business plans are so bound up with the stock market itself, says economist Mark Zandi of RFA Dismal Sciences in West Chester, Pa. A surprising amount of their value arises from their holdings in other Web and high-tech firms. The SEC is even considering whether Yahoo should be reclassified as a mutual fund, because its outside stockholdings amount to more than three quarters of its assets (its principal venture: Yahoo Japan).
“Hold for the long term” doesn’t apply to companies like this–or, indeed, to any particular industry or stock. As a strategy, its success depends on holding the market as a whole–either through index mutual funds or a truly diversified portfolio of individual stocks. And the truth is, few stock pickers diversify across American business. You own today’s best stocks, but they won’t be tomorrow’s best stocks. You’ve been rolling the dice and in this game, luck never holds.
The Fed, by the way, hasn’t pricked this bubble all by itself. Bubbles end mysteriously, for reasons internal to themselves. You don’t see a sudden, final crash that tells you it’s over, Shiller says. For a while, the stocks may recover lost ground. But over five-year time periods, there’s a tendency for outsize price gains to be reversed.
What to do now? Save more money, cut back debt, trade stocks less, quit envying neighbors who you think hit Qualcomm right, diversify, remember bonds, don’t borrow against your home to invest, hold U.S. and foreign markets as a whole–all the things you know by heart. One of these days, our obsession with stocks is going to pass and we’ll look back in wonder at the way we were.
