Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
A View from the Shore
08/15/2003 12:00 am EST
At each Money Show, I try to assess the general consensus among the speakers, and look for common themes heard throughout the conference. What I found most intriguing at The Atlantic City Money Show was a growing sense within the advisory community that being one of the crowd and investing by the old rules no longer works. In this special issue we will try to cover a number of these emerging themes. (For more information on any of the advisors below, simply click on their photos.)
At the various workshops, panels, and seminars I attended, I noticed a decided tilt towards greater independence of thought, a new way of looking at old problems, and a willingness to go out on the limb with less conventional investment ideas. It seems that the days of recommending the "safety" of large cap index funds are gone. Much of the advisory community is now seeking its returns from emerging trends, small and mid-cap stocks, and a variety of less conventional investment vehicles such as ETFs - as well as alternative means of generating income. And even within the large cap arena, the focus has changed; there is now a decided emphasis on dividends in order to benefit from the new tax environment.
Many of the advisors I listened to were cognizant of increased risk in the current environment and to help mitigate these risks, there was a concurrent emphasis on investor education, diversification, the need for well-balanced portfolios, a focus on asset allocation, patience, and a greater consideration of each investor's own risk profile. And while a heightened sense of caution was a watchword of the day, the vast majority of advisors appeared confident that now is a time to be accumulating long-term stakes in well-positioned growth stock. Indeed, the trend toward smaller stocks and special situations - particularly in the technology and medical fields - was unmistakable.
Frank Cappiello, president of McCullough, Andrews & Cappiello, makes an excellent case for investing away from the radar screens of Wall Street. He explains, "When investing in stocks, the most important thing to understand is that it is not important what you like. What is important is what institutions like or are about to like in about six to ten months. You want to know what they are buying with their money and their clients' money. Think of a beauty contest. It’s not important who you think is the prettiest. What’s important is who the judges are going to pick. On the NYSE in the past couple of years, 90% of the trading were institutions. Most of these analysts are MBAs, are very bright, and are very computer literate. How are individuals going to compete? It’s like an old WWI plane that goes 110 miles an hour trying to compete with an F-18 that goes Mach 2. The best way to compete against the Wall Street crowd is to focus on an area where they can’t beat you. Using our analogy, an F-18 takes 2½ miles to turn, while the slower WWI plane can turn in a couple hundred yards. Let’s take this farther: If you’re flying a $30 million F-18, you’re not going to be looking for a couple of soldiers. You’ll be looking for tanks and fortifications. But the WWI plane can go for the small stuff. It’s the same in the stock market. The one place that the institutions won’t go is the area we call micro-caps, which can go from practically no capitalization up to $100 million. The reason is that an institution or a mutual fund has to buy a lot of stock at a time and getting in and out of a micro-cap is very difficult and institutions don’t like to do that. If they are going to spend the time and money, they are going to spend it on a big target. But like the pilot of a small plane, you can go after these stocks. And some of these stocks might become the next Microsoft. That is where you can beat the institutions."
There was also a noticeable trend among Money Show speakers towards "realism" and the need for investors to readjust their expectations. Perhaps the best summary of this sentiment came from Howard Gold, editor of Barron's Online. "Today we are in what one could call the ‘new’ new era in investing. Many of you may still be licking your wounds from the last era in investing. But I would suggest, the new market that we are in now will actually be better for investors in the long run than either the bubble period or the bear. The last new era ran from the mid-1990s to about 2000–and then ended with a bang. Given the events of 9/11, the world is now a very different place. In that previous era CEOs were celebrities and star analysts were gurus. And unfortunately, too many investors unwisely followed the crowd. Investors must now understand that they have to take more responsibility to educate themselves, understand companies better, and be skeptical about statements from pundits and corporate chieftains alike." But for those willing to accept this responsibility, Gold sees a better–and more realistic–environment ahead. He explains, "Now, I’m not expecting double-digit annualized returns in the years ahead. Rather gains of 8% including dividends are much more in line with what the markets have historically returned. Which brings me to expectations. For investors, the dream of instant riches is over. We’ve learned the hard way when it comes to managing money that the only people we can really believe in is ourselves. That is reality. Cautious optimism and lowered expectations from self-reliant investors who are freer of illusions and a market that actually goes up over time–all in all, sounds like a pretty good ‘new’ new era."
While the previous three-year bear market has certainly taken its toll, the rebound this year has brought back a glimmer of hope among investors and advisors - and while still muted, there was a growing sense of optimism at the conference. Few were ready to say that it was all clear ahead, but equally, there was much less of a focus on doom and gloom. A few months of rising prices may not be enough to make up for the previous downslide, but it is a step in the right direction.
I always find money manager Kenneth Fisher to be an intriguing speaker, and in his remarks at The Money Show, he helped explain part of the basis of investor caution and "depression". Fisher notes, "In markets, any big move to change is met with a lot of fear. Inherently, this comes from a concept in behavioral finance known as myopic loss aversion–which basically says that if I take from you and give to you, the people I took from will hate it a whole lot more than the people I gave to will like it. In fact, a normal, middle-of-the-bell-curve person hates losses about 2 ½ times as much as they like gains."
If that's the case, we may have a while to go before the investors' "hate of losses" and sense of caution is replaced by their "like of gains" and the greed that historically marks a top. What about all the negatives such as geopolitical risks, soaring state and Federal deficits, the potential for continued corporate corruption, etc.? Says Fisher, "The market is a discounter of all known information. And if everyone here is familiar with a specific problem, then that concern has likely already been priced into the markets. That’s a rule you can take to the bank."
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