Where has the retail investor gone?
By Barry Ritholtz
Lots of folks are wondering what happened to the Main Street-mom-and-pop retail investors. They seem to have taken their ball and gone home. I don’t blame them for feeling put upon, but it might be instructive to figure out why. Perhaps it could even help us determine what this means for risk capital.
We see evidence of this all over the place: The incredibly light volume of stock trading; the abysmal television ratings of CNBC; the closing of investing magazines such as Smart Money, whose final print issue is on newsstands as it transitions to a digital format; the dearth of stock chatter at cocktail parties. Why, it is almost as if America has fallen out of love with equities.
Given the events of the past decade and a half, this should come as no surprise. Average investors have seen not one but two equity collapses (2000 and 2008). They got caught in the real estate boom and bust. Accredited investors (i.e., the wealthier ones) also discovered that venture capital and private equity were no sure thing either. The Facebook IPO may have been the last straw.
What has driven the typical investor away from equities?
The short answer is that there is no single answer. It is complex, not reducible to single variable analysis. This annoys pundits who thrive on dumbing down complex and nuanced issues to easily digestible sound bites. Television is not particularly good at subtlety, hence the overwhelming tendency for shout-fests and silly bull/bear debates.
The factors that have been weighing on people-formerly-known-as-stock-investors are many. Consider the top 10 reasons investors are unenthused about the stock market:
1 Secular cycle: As we have discussed before, there are long-term cycles of alternating bull and bear markets. The current bear market that began in March 2000 has provided lots of ups and downs — but no lasting gains. Markets are effectively unchanged since 1999 (the Nasdaq is off only 40 percent from its 2000 peak).
The way secular bear markets end is with investors ignoring stocks, enormous P/E multiple compression and bargains galore. Bond king Bill Gross and his Death of the Cult of Equities is a good sign we are getting closer to the final denouement.
2 Psychology: Investors are scarred and scared. They have been scarred by the 57 percent crash in the major indexes from the 2007 peak to the 2009 bottom. They are scared to get back into equities because that is their most recent experience, and it has affected them deeply. While this psychological shift from love to hate to indifference is a necessary part of working toward the end of a secular bear, it is no fun for them — or anyone who trades or invests for a living.
3 Risk on/risk off: Let’s be brutally honest — the fundamentals have been utterly trumped by unprecedented central bank intervention. While this may be helping the wounded bank sector, it is not doing much for long-term investors in fixed income or equities. The Fed’s dual mandate of maximum employment and stable prices seems to have a newer unspoken goal: Driving risk asset prices higher.
When investors can no longer fashion a thesis other than “Buy when the Fed rolls out the latest bailout,” it takes a toll on psychology, and scares them away.
4 Poor returns across all asset classes: Investors have been burned by a series of booms and busts: dot-com stocks (2000); real estate (2006-?); equities (2008-09); even gold (2011-12) is significantly off its 2011 highs. Perhaps after these experiences, too many investors have decided that investing isn’t such a great deal after all.
5 De-leveraging: The marginal buyers are out of the market as they de-leverage excess credit consumption. There is an entire cohort of investors who are no longer playing with equities. Indeed, they have been priced out of all investment options as they rebuild their personal balance sheets.
6 Wall Street scandals (Part I): First the market gets blown up by bankers, and then Wall Street is rescued. Meantime, Main Street mostly got nothing but the invoice for the bailouts. If you don’t think the credit crisis and Great Recession have moved people to stay away from the casino, you are kidding yourself.
Many people believe the game is rigged against them. They aren’t conspiracy nuts, they are merely observing what has been going on since 2007. At the very least, it appears that bankers have corrupted the political process for their own gains. Investors are wondering why they should participate in such an absurd environment.
7 Trendless economy and markets: The economy has been operating just above stall speed. Manufacturing has been strong, employment has not, wages are flat and retail spending unremarkable. This soft economy does not get investors fired up about putting risk capital to work. And a range-bound market simply makes trading too challenging for most participants. Paying fees for zero returns, as we saw in 2011, isn’t very encouraging, either.
8 Bank scandals (Part II): Think about the recent scandals at various banks and investment firms. MF Global, Peregrine Financial, Knight Trading, Standard Charter and JPMorgan Chase — yet another set of factors that are persuading investors to stay away. Theft and incompetency appear rampant, and ethical transgressions seem to be part of ordinary business. Why on Earth should anyone entrust hard-earned money to those guys?
9 High frequency trading: Investing is a zero-sum game. The gains that the high-frequency traders have taken come right off the bottom line for anyone with a pension or retirement account. The complexity may be beyond the average investor’s comprehension, but the impact is not. People can smell when they are being ripped off, and you can blame the exchanges and high-frequency trades for that.
10 ETFs: Some people seem to have wised up to the stock-picking game. It was certainly fun while it was working during the rampaging bull market, but that has been over for years. When correlations go to 1, stock picking no longer matters. Add to that the advantages of lower costs, fees, taxes and turnovers, and the traditional stock-picking approach looks like a fool’s errand.
Does the average Main Street mom-and-pop investor think these things matter? I believe they do, and that is why so many investors have voted with their feet.