Multi-Unit Franchisee Magazine Issue III, 2011 | Page 70
InvestmentInsights
by Carol Clark
Time for a Simpler Approach
Investing insights for the 21st century
A
s we’ve seen in high-definition in the past
few months, the factors that must be accounted
for while structuring financial affairs are much
more complicated than ever before.
The 1980s and 1990s were great times to be an investor. Interest rates were falling dramatically, instigating a
huge and lasting bull market in fixed-income investments.
Credit became easy to obtain and even our tax policies
encouraged consumerism. Investors were pouring into
the markets with the advent of 401(k) plans and IRAs.
Companies were going public at record rates, resulting
in a lot of new and interesting “stuff” to look at for possible investment and creating liquidity for scores of aging Baby Boomers. Regulations for many industries were
easing, and the growth of all sorts of investment vehicles
(e.g., mutual funds, exchange-traded funds, private equity)
was skyrocketing. Globalization took hold, especially after
the fall of the Berlin Wall, and capitalism began to more
rapidly spread around the world.
According to data from the Investment Company Institute (ICI) and the SEC, the percentage of the population that
owned publicly held stocks rose from about 5 percent in 1980
to nearly 50 percent in 2000. Particularly in the latter half of
the 1990s, participation was arguably fueled by abnormally
high stock market returns. For example, the 5-year annualized rate of increase in the S&P 500 index between 1995 and
2000 was 29 percent!
It was a simpler time at the outset, with fewer investment
choices and a slower pace of activity. In 1980, there were a
mere 564 mutual funds, and average daily trading volume on
the New York Stock Exchange (NYSE) was 45 million shares,
according to ICI. Total mutual fund assets amounted to $135
billion. There were no IRA, 401(k), or hedge fund assets. (The
former hadn’t even been legislated into existence, and the latter were too nascent to count.) Personal computers hadn’t
been invented, so security analysis took a much simpler form:
heavy on the use of pencil, paper, slide rule, reading of SEC
filings, and one-on-one conversations with management and
suppliers. Moreover, there was no ability to crank out reams
of comparative analysis at the push of a button. No email, no
Google, no stock screens. Any sort of “quantitative” analysis
was an arduous and time-consuming endeavor.
By 2000, there were more than 8,000 mutual funds, and
average daily NYSE volume topped a billion shares a day (ICI).
Average holding periods dropped from three-plus years to
barely a year. As one money manager quipped, people went
from “owning stocks to renting them.” And now? We have
24/7 access to more investment and financial news than we
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Multi-Unit Franchisee Is s ue III, 2011
can possibly absorb—with most of it available for free. The
same holds for analytical tools.
Given all the money expended on brilliant people and
high-powered technology in the intervening years, I’ve often wondered why overall returns haven’t improved. Perhaps
it’s because:
1. People still pull the “levers,” and people are prone to all
sorts of behavioral idiosyncrasies—especially when stressed
and confronted with unpredictable situations.
2. Investors have gotten away from the basics of sound
investment policy. Rather than analyzing the merits of specific investments, excessive time often appears to be placed
trying to outmaneuver other investors. Many essentially view
the investment process as buying lottery tickets rather than
pieces of companies.
3. The more creative Wall Street gets in “synthetic” products and complicated management structures, the more middle people there are to take a bite out of the potential profit
available, if any.
4. Nervous investment trigger fingers are exacerbated by
24/7 news flow across multiple channels. Brain scientists have
illustrated that when confronted with tons of information, we
either shut down and don’t want to make any decisions, or we
try to respond to all of it by tweaking “this or that” in a kneejerk fashion. More often than not, the common state is swinging wildly from one extreme to the other, basically reverting
through the mean, not to it, on the way to the other extreme.
Today, we are left with a seemingly more complicated world,
even if we have the ability to slice and dice its risks into more
finely digestible pieces. In addition, there are more market
participants influencing daily trading: sovereign wealth funds,
governments pursuing self-indulgent policies, emerging trade
blocks, more citizens stepping toward democracy, and capital
markets. Given the knowledge that the more choices we are
confronted with, the more likely we are to