The New York Times (registration required) decided to promote the notion that small investors are "safer" in the current stock slide. Here are four reasons why I am convinced that this argument is hokum:
- Big funds are scrambling for liquidity and if they own stocks, they will sell them. While I agree that hedge funds and other institutional investors have been driving this market, that does not mean that the big players' market moves don't affect small investors. That's because the big funds are getting cash calls from their investors and from the banks that let them leverage up. And if they have stocks, they will sell them to raise cash. This will hurt small investors.
- Small investors fled stocks after the dot-com crash and piled into real estate. After losing parts of their shirts investing in dot-com stocks during the 1990s, individual investors shifted gears and put money into real estate. This worked well for a while. But when the real estate market started to tumble in 2006, these small real estate investors got burned some more. The mortgage-related problems of the big funds are hurting the small investors' real estate values even more by cutting off mortgage money. Banks foreclosures are throwing more real estate into the market which further depresses home prices.
- The economy is fundamentally weak and that does not explain stock prices anyway. The economy looked strong because consumers have been able to borrow so much money and spend it on consumer goods. But the liquidity crisis of the big funds is forcing banks to retrench. And individual investors are paying the price as banks tighten up their credit standards. With stricter borrowing terms and lower or non-existent home equity, consumers will have less "liquidity" available to prop up the economy. Regardless, I don't think the broad economy moves stock prices. What matters is the performance and prospects of industries -- and many industries are hurting.
- The lack of information about what is going on in the market will scare away small investors. As I have posted recently, there is an enormous information vacuum about who owns how much of the alphabet soup of securities backed by mortgages etc. and how much money these securities owners must pay back. This lack of information creates fear among individual investors and makes them hesitant to invest. This could drive down stock prices.
I think this article's headline should be changed to: "Brokers try to keep small investors from fleeing market -- otherwise how can they fuel their yachts?" What do you think?
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
8-14-2007 @ 12:21AM
Jud said...
We are only seeing the "eb" of hard times here in America. We have been propping up here, shifting finances there, readjusting and justifying everywhere - when - in reality it is all in vain. Until the real "Powerbrokers" that are hidden from most everyone's view are made known and the time is ripe for the "real change" of the milleniums - we will continue only to be a facade for what is not really real and predicted for milleniums. To many what I am saying will just disregard, not understand and continue to do business in the old ways, but... the time is near when global change and recourse will alter world events for everyone and will America have the upper hand in this? the answer is no.. it will only be a partial player for the bigger picture that will encompass us all and spin all of us on our heels, reeling and not knowing where to turn, what to do and how to keep what we have - it is all so superficial. Time is so near to all of us - are we really prepared and willing to accept the change(s) and consequences - I doubt it.....We will all see.....
8-14-2007 @ 12:43AM
Jud Kastner said...
Stock Markets are reeling; investors are perplexed; money moguls and power brokers are teetering on disaster. Why is this so? We only have to look as far as our real inner selves to know what is right and what is wrong; what is good and what is bad. Who is really leading us this way. That is a question each of us really know but are really afraid to answer. No, there is not a formula that we have to follow; a model that is already in place or needs to be developed. Each being is given the tools to choose what is needed to get us out of this mess. I don't think it can be done in a boardroom, in an investor's club or the highest regencies of the land. It is an individual, innate gift given to each of us at birth. The problem is that we haven't developed it like we have in our supposed intellectual capacities and learned skills that we so depend on. This blog is not for the highminded, for they will falter; it is not for the financially skilled, for they will be fooled. It is for those that really don't have a clue on what to do and need to retreat and depend on that understanding that we really don't understand. This thought can be applied to many if not most of these articles in the finance & money section of AOL and really to the world. Do we really understand what is being said, probably not, because if we don't we are too high minded, too egotistic too superficial and self-centered to understand. This is a concept that has been lost, discarded and ignored for ages. It is why we in this American land and Global market are in such shambles. We really don't know how to use what is really free and given to each one of us. Do you know what it is?