The public has every reason to believe that the present game is rigged. - Former Treasury Secretary Donald Regan to Congress, May 11
Charles Allen is a computer programmer in Akron, Ohio. Like millions of other Americans, he is also an investor. Although he makes his living working with computers, he doesn't like it when computerized ``program trading'' roils the financial markets.
Before ``Black Monday'' last Oct. 19, Mr. Allen owned shares of five to 10 corporations. Now, he says, ``I'm only messing with two.'' It's the volatility of the financial markets that worries him.
``Within half an hour the stocks could change a ton. I can't afford the luxury of sitting in front of a tube all day and following the market. That's why everybody I know is out of the market now.''
Surveys show that investor confidence - a reading on whether families plan to buy stocks in the weeks ahead - is its lowest in about 35 years. The ``little guy'' is found less and less in the stock market.
Program trading (using high-speed computers to detect tiny differences between stocks and stock-index futures and blasting the market with trades) gets much of the blame for recent market volatility and for scaring little investors.
To try to rectify this, a number of leading financial institutions have sworn off the technique in the past week. But even if program trading were completely eliminated, understanding and following the stock market today would require much more complex data processing capabilities than a person working 9-to-5 could hope to field.
To do it right, professional investors say, thousands of companies must be considered all at once: How well are these companies managed? Is market share growing? Will they prosper or founder when the economic winds shift? What's the feel on the floor of the stock exchange? Is there a big buying or selling program in progress? Are corporate raiders, program traders, arbitrageurs, or Japanese investors a factor?
Such concern is why the little investor has mutual funds. Allen of Akron says the lack of volatility and the ``liquidity'' (ease of getting your money out) of mutual funds reassures him. He invests through the Boston-based Fidelity Group.
Largely because of the complexity of the financial markets today, an estimated 36 million other American investors pay for the services of professional portfolio managers who operate mutual funds. With billions to invest, mutual funds are able to put together diversified portfolios, plug into sophisticated computer data bases, and visit key personnel at corporations they invest in.
There are more than 2,500 mutual funds to choose from - five times the number in 1980 - and the number of mutual fund shareholders has soared, says the Investment Company Institute, the trade association of the mutual fund industry. Most individuals now shop for funds or for fund families (Fidelity, Kemper, Scudder, T.Rowe Price, Merrill Lynch and so on) rather than for individual stocks.
``If you have less than $50,000 to invest, it is very costly to have a portfolio of your own securities,'' says Alan Leifer, who runs Fidelity's Trend Fund, ``even if you have the time to follow them.
``In the old days,'' he adds, ``you'd buy one company and participate in the growth of the American economy. But now you need to scrutinize even the leading players in the industry. After five years of economic revival, GM is not doing that well. It's an enormous effort to track companies and figure out how they will do under various economic scenarios.''
And then there is program trading. The mutual fund industry is very much opposed to it, says Eric Kanter of the Investment Company Institute, which represents 90 percent of the mutual funds in the United States.
Says Mr. Kanter: ``Most people in the industry are concerned about program trading frightening the small investor.'' New sales of mutual funds have fallen off in recent months because of generally shaky investor confidence.
Kanter notes, however, that mutual funds really could not use program trading even if they wanted to, because of what he calls the ``short-short test.'' This is a rule that says that only 30 percent of a fund's income during any year can come from securities held less than 90 days. Stocks are bought and sold much more rapidly than that when program trading is used. Mutual funds can be hurt by the market volatility, but the impact is buffered over widely diversified holdings.
Meanwhile, not all individuals have deserted the market. Sixty percent of all outstanding equities were owned by individuals at the end of last year, reports the Securities Industry Association. That's down from 84 percent in 1965, but it is still by far the majority. (Institutions owned the balance: 16 percent in '65 and 40 percent today.) One-quarter of the share activity on the New York Stock Exchange is still being done by individuals.
Lone-wolf investors persist. Hobart Pollard is one. He runs a construction company in Plymouth Meeting, Pa., and enjoys playing the market. Yes, he says, the 508-point plunge last October and other losses concern him. He thinks ``corrective measures'' are needed to stem program trading. But he is not ready to throw in the towel.
``I enjoy doing it myself,'' he says of his buying and selling of stocks. ``And I do as well as most mutual funds do.''
Edwin Elton, a finance professor at New York University, says that an individual with more than $50,000 to invest can indeed do as well as most mutual funds - even investing stocks somewhat randomly. And if, as Donald Regan has charged, the market is ``rigged,'' Professor Elton says, an individual would actually be on on equal footing with most mutual funds. The key to playing the market, he says, is to be careful about choosing stocks and to hold on to them for the long run.
Another bit of advice comes from James Cloonan, president of the American Association of Individual Investors in Chicago. He recommends avoiding blue-chip stocks like International Business Machines and General Motors, since these are the ones that are yanked around by program trading and arbitrage. Smaller-capitalization stocks, he says, are outperforming the blue chips.