Individuals dip toes into market
Some small investors buying stocks again
NEW YORK — Despite recurring nightmares from the financial crisis, the fear factor hasn’t caused every individual investor to flee the U.S. stock market forever.
There’s no denying that many investors still suf- fer from a form of post-traumatic stress disorder. After watching their 401(k) balances cut in half and the value of their homes shrink, these risk-avoiders are still content with parking their cash in perceived havens, such as government bonds, certificates of deposit and passbook savings accounts.
But some investors, enticed by stocks trading near fresh two-year highs and what they believe to be an improving investing environment, have regained their courage and are tentatively reentering the market.
“You can’t be afraid,” says Karthik Krishnan, a 51-year-old information technology consultant from South River, N.J. “I am back in the market.”
Krishnan, who admits to suffering a brief scare that caused him to stop buying individual stocks in 2008 at the height of the financial turmoil, says he’s started nibbling at stocks again. On Nov. 11, he plunked down roughly $20,000 to snatch up 1,000 shares of computer networking company Cisco Systems.
Analysts are split on whether the fledgling re-
newal of animal spirits on Main Street is a good sign. Some say it could be signaling that the buyers’ strike that has been in place since global markets nearly melted down two years ago is nearing an end, setting the stage for a new up-leg for the stock market. Others warn that it could be a sign of a market top, as mom-and-pop investors have a poor record when it comes to market timing. The buying by Krishnan and other folks coincides with recent selling by socalled “smart money” investors such as CEOs and chief operating officers.
Why is Krishnan buying stocks again? He’s confident the stock market will climb back to new highs. Not tomorrow. Or next week. Or even next year.
“In the next three or four years, the Dow will (be) above 15,000,” says Krishnan, who kept his mutual fund purchases on autopilot during the 2007-2009 market rout.
The Dow’s all-time closing high was 14,164.53, which it hit on Oct. 9, 2007. It closed Friday at 11,092.00, almost 22% below its peak.
Krishnan’s buys are geared to take advantage of different market trends. On why he bought Cisco a few weeks back: “It gives me tech exposure,” he says. In late summer, he snagged 200 shares of Colgate-Palmolive, the consumer products company best known for its toothpaste and dish-cleaning soap. (“It’s a play on dividends.”) He also picked up 100 shares of credit card giant Visa in May. (“MasterCard was too expensive.”) His buying spree kicked off in mid-February when he jumped into Nike, a global sports brand known for its athletic shoes and apparel, after he concluded the market’s recovery seemed on track. (“It gives me international exposure.”)
Up and down days
The buying by Main Street investors precedes the market’s recent pullback, which has been sparked by profit taking after a big 18% run-up for the Dow Jones industrials since the lows in July and a flareup in headline risk. Investors have been recently spooked by Ireland’s debt crisis, a military skirmish between North Korea and South Korea, fears of an economic slowdown in China, and sensational headlines of FBI raids of three hedge funds and rumors of a coming federal crackdown on illegal insider trading.
Data that track mutual fund cash flows, however, still highlight investor skittishness.
While individual investors have yanked more money out of U.S. stock mutual funds than they put in every week since the scary one-day “flash crash” 29 weeks ago, the pace of withdrawals is slowing. Flows to U.S. stock funds almost turned positive the week ended Oct. 20, with outflows of just $217 million. In the week ended Nov. 17, the latest data available, domestic stock funds suffered net outflows of $2.8 billion, says the Investment Company Institute, a mutual fund trade group. That’s sizable for sure, but still down sharply from the week of Oct. 15, 2008, when they yanked a record $23.5 billion out of U.S. stock funds after the Dow suffered daily losses of 733 and 679 points in a five-day span.
In a further sign that risk aversion may be abating, inflows to all stock funds — U.S. and foreign — have been positive four of the past six weeks, following 23 weeks of outflows.
Most investors still are pouring cash into bond mutual funds, as they look to reduce risk but still garner decent returns in the form of yields. Flows to all bond funds have been positive every week since the start of 2009. In that two-year period, $667.6 billion went into bond funds, ICI data show.
Michael Waggoner, 68, a professor at the University of Colorado law school, used to be one of those investors getting out of stocks and shifting the money into bond funds, as a way to reduce risk as he nears retirement.
But a year ago, fearing a “bubble” in the bond market, he started putting all his new retirement money into the stock market, both at home and abroad. He stresses his foray back into stocks is less a bet on the stock market, which he thinks is likely to do well in coming years, than a bet against bonds.
“I’m not buying stocks out of greed,” says Waggoner. “It is more a fear of a collapse in bond prices. I am not chasing income. I am scared of a big capital loss in bonds.”
Yields in all types of bonds have fallen sharply this year, pushing prices, which move in the opposite direction, higher. Investors who own bond funds risk losing capital if bond prices fall.
Is now the time?
Pessimists fear that Main Street investors are getting back into stocks at just the wrong time. Some analysts are warning of a near-term market peak. Bullishness on the part of individual investors hit its highest point since January 2007 the week of Nov. 10, when bulls hit almost 58%, another sign of sentiment perhaps getting too positive.
An academic paper co-authored by Geoffrey Friesen, an assistant professor of finance at the Uni- versity of Nebraska-Lincoln, found that mutual fund investors who tried to time the market actually reduced their average return by 1.56 percentage points annually. The study, published in 2007, looked at cash-flow data for mutual funds from 1991 to 2004.
“Historically, individual investors have done a lousy job of timing their purchases,” says Friesen. “In general, they tend to get in closer to the top and tend to pull out closer to the bottom.”
It’s not uncommon for fund investors to chase hot performance, he adds, as they’ve been doing the past few years in the bond market. They also tend to sell to flee poor returns, as many did during the 2007-2009 stock bear market. Friesen says the massive cash inflows to bond funds the past two years suggest that the big gains in the bond market are behind us.
But at the same time, the fact stocks are trading near two-year highs also suggests there was a better entry point for stocks earlier in the rally.
Wendy Hunt, a 38-year-old married mom with two daughters from Cincinnati, is more than happy with her entry point, which occurred much earlier in 2010. Nor has she lost the good feeling when stocks go up.
“We have returned to the stock market in a big way,” she says. “We’ve seen a massive return in the past two quarters and expect to see continued growth in the fourth quarter.”
She placed her bets on consumer packaged goods companies, such as Kimberly-Clark, Procter & Gamble and Kellogg, which all sell goods that consumers buy even in tough economic times. Her biggest holding is tech titan Apple. The maker of the popular iPad and iPhone accounts for 30% of her portfolio.
“We’re moving back into stocks because of the growth and positive momentum of the market,” says Hunt. “We feel like consumer confidence is rising, and the market is reflecting it. Why not ride it while we can? We are up exponentially from where we were last year at this time. Stocks are what’s pulling us up!”
Smart or dumb money?
But at the same time people such as Hunt and Krishnan are buying, corporate insiders are selling. That raises the question of whether individuals, often referred to as the “dumb money,” are getting in just as the “smart-money” crowd is exiting.
Selling by “insiders” of Standard & Poor’s 500 companies — or “in-the-know executives” such as CEOs, chief operating officers, chief financial officers and members of the board of directors — hit a record high in the Nov. 1-9 period, compared with all the other time periods that have been tracked by InsiderScore.com since it began tracking data in July 2003, says director of research Ben Silverman. CEOs in that period sold shares valued at more than $312 million, more than double the average since 2004. The total excludes Microsoft CEO Steve Ballmer, who sold an eye-popping $1.3 billlion in shares.
“For investors looking for market clues, the magnitude of the selling is telling us that a bunch of people involved with running big corporations felt, for whatever reason, that now is a good time to sell stocks,” says Silverman.
While there are always standard reasons why executives sell stock, ranging from tax purposes to diversification, the recent selling coincides with the market’s recent top hit on Nov. 5 and fears that taxes on capital gains might rise in the new year if Congress doesn’t extend the soon-to-expire Bush-era tax cuts.
New stock sales by companies — either via initial public offerings such as the recent General Motors sale or secondary offerings — are also on the rise, with more than $40 billion in stock sold to investors this year, according to estimates by TrimTabs Investment Research.
“Insiders are selling, and so are companies,” says TrimTabs director of research Charles Biderman. “Individual investors should be sitting on the sidelines worried.”
But the sidelines is the last place Stacy Harris, 58, of Nashville, wants to be.
“I’m putting my money into preferred stocks and IPOs,” says the publisher of Stacy’s Music Row Report. “I’m back where the real money is.”
Others share her view. There is talk on Wall Street that “some pension funds are beginning to look at U.S. stocks again,” a recent Citi report noted.
And bulls such as Jim Paulsen, chief investment strategist at Wells Capital Management, say the bullishness on the part of individuals is warranted.
“The two-month surge in the stock market to new recovery highs has left investors thinking, ‘What now?’ ” Paulsen says. “Many believe this rally was fabricated with hype about the midterm elections and the Federal Reserve’s (second attempt to lower interest rates by buying government bonds). But the rally is more likely the result of improving economic fundamentals. Therefore, the likelihood of further upside still appears promising.”
What would spook the optimists? “The only thing that would scare me is if the housing market (takes another dive), and the economy suffers a double dip,” Krishnan says.
“I am back in the market”: Karthik Krishnan, of South River, N.J., is investing in individual stocks again. “You can’t be afraid,” says the information technology consultant. Some of his recent investment choices, at right:Getting back inKrishnan’s buys show bets on various investing themes.
Colgate: 200 shares Aug. 27
Cisco: 1,000 shares Nov. 11
Visa: 100 shares May 23.
Microsoft CEO Steve Ballmer: He sold $1.3 billion in company shares in November. He said the sales were made to diversify his investments and aid his yearend tax planning.
James Paulsen: Says bullishness is warranted.