YOU CAN DO IT!
Joe Smith does it. And so does Pat Blanco. Irwin Dubinsky and Lennart Width and Rick Boettcher and Mark Pope all do it, too.
These people have taken charge of their own financial destinies. They buy stocks.
By that simple act, they and uncounted thousands just like them violate the investment world's most precious notion--that individual investors are born losers when it comes to buying equities. They fly in the face of conventional wisdom and have a lot of fun doing so. And above all, they make money--often a lot more than they could make by leaving their investments to the pros.
Smart individual investors have found an answer to the financial problems that face millions of Americans who can no longer count on rising incomes and corporate largess. If they're like Width, who has been running his own portfolio for 37 years, they can finance a worry-free retirement (page 6941). He's a dazzling role model for baby boomers, many of whom will be facing retirement with fast-shrinking pensions--and usually insufficient savings, partly because they don't own enough stocks.
If they're like Phil Carlson, a New Jersey social worker, they can finance their children's college education (page 70). If they're like Boettcher, they can accumulate six-figure portfolios on a pharmacist's salary--and enjoy a fascinating pastime (page 6539).
PASS THE PROS. The stories of Width, Carlson, Boettcher, and others were culled from interviews conducted by BUSINESS WEEK with scores of successful individual investors nationwide. Their widely disparate methods are more instructive than a shelf full of how-to books. Their experiences also debunk the notion that Wall Street knows best. By and large, professional investors do a mediocre job of stock-picking. That, along with their expenses and fees, causes them to lag well behind the market (chart).
A percentage point or two may not seem like a lot, but it looms large over time. A $10,000 investment 10 years ago in the average equity mutual fund would have grown at an annual rate of 11.9%, while the Standard & Poor's 500-stock index grew 15.6%. The equity fund would have grown to $30,782; the S&P 500, $42,617.
There is, of course, no way of peeking into the portfolios of thousands of individual investors. But the next best thing is the data collected by the National Association of Investors Corp., the umbrella organization of 9,200 clubs of individual investors nationwide. Each club in the network maintains a portfolio whose results are reported to the NAIC. The numbers are impressive.
The returns belie the clubs' stodgy image. The average club in the 1992 survey earned a 13.9% annual return over its life. Even more noteworthy is that 69% of them have beaten or matched the S&P 500 since they have been investing.
The lesson taught by the clubs is that beating the pros at their own game is not a supernatural act. People from all walks of life do it. But they're serious about it, and they're in it for the long haul. Make no mistake: The stock market is not for dilettantes. Investing is not a game. It is not gambling or "playing the market" on a hot tip. It can be intimidating--and anyone who tries it will make mistakes. But the individual investor has advantages that would make an institutional investor drool.
HOT AND COLD. First, the individual investor is just that--an individual, not a member of a herd. Institutions are notorious for running in packs, following the lead set by influential brokerage-house analysts and buying, en masse, hot sectors. But sectors that are sizzling today can be as exciting as cold meatloaf tomorrow. By sticking with the crowd, institutions guarantee that their results will never be more than average.
Individuals also have no need to look good--or to sell themselves to pension-fund trustees. Neil Johnson, a managing director of investment consultant Hamilton & Co. in Princeton, N.J., notes that money managers frequently become pigeonholed. At the behest of plan sponsors and consultants, professional investors box themselves into investment styles: large-cap value, small-cap growth, and every permutation inbetween.
By emphasizing style, investment pros can lose loads of money for their clients but still claim victory--if their narrowly defined peer group has done even worse. This rigid adherence to an investment style also ties their hands when the market goes against them. "The only style that matters is making money," says Johnson, "and individual investors do whatever they have to do to achieve that." Flexibility is one big reason why private investment partnerships for the wealthy, known as "hedge funds," have achieved impressive results compared with conventional money management.
Indeed, the flexibility enjoyed by individuals will come in especially handy if, as many market observers fear, the stock market is overvalued and facing a crash. No one can predict if such worries are correct, of course--and to contrarians, the widespread bearishness is actually bullish. Still, if an individual believes the market is riding for a fall, the choice is clear--sell short. Short-selling is a luxury that is generally denied mutual funds and pension funds by dint of custom, regulation, and client preference.
With no client, no board of directors, no quarterly performance targets, no need to beat "benchmarks," the smart investor can pick a stock no matter how much Wall Street hates it. "The individual has an advantage in that he has a much longer time horizon," notes John Markese, president of the American Association of Individual Investors. The individual, he adds, can make picks that are attractive but that are ignored by the institutions, because the market cap of the company is too small or because large blocks of stock are not available.
The individual has another major advantage. Institutions often "dress up the portfolio" by dumping unattractive stocks by the end of the quarter. Sometimes, that means selling sound companies that have temporarily fallen on hard times. The wholesale housecleaning of drug stocks earlier this year is a prime example. Individuals never have to sell companies they like just because the market has temporarily turned against them.
True, the big institutions have some advantages that look formidable at first blush. For one, they're wired for instant information. If there is news about a company, good or bad, they can react immediately--and often wind up making a lousy decision. On Apr. 28, after the chief financial officer of Eastman Kodak Co. resigned, institutions dumped the stock, and the shares fell almost 10% in one day. But the stock has since recovered neatly. Another illusory "institutional advantage" is their low commissions. But individuals' higher transaction costs are insignificant over the long haul.
TIME AND EFFORT. Sure, there are pitfalls for the neophyte investor. Buying stocks is not for everybody. It requires time and effort, to research the stocks and then monitor their performance. If you can't make the commitment to invest in stocks the right way, stick to mutual funds.
If you're ready to start buying stocks on your own, take a cue from the successful individual investors interviewed by BUSINESS WEEK and don't let the conventional wisdom lead you astray. They have been succesful by ignoring some of the most oft-cited standard rules of investing. For example, most investment advisers argue that the older you are, the more conservative your investments should be, and that as you approach the "golden years," you should be almost entirely in conservative income-producing issues such as utilities and bonds.
But the older investors that BUSINESS WEEK interviewed have one word to say about that: bull. They take a far bolder approach, and it has served them well. They still keep a large chunk of their assets in growth stocks. Yes, people at the beginning of their investment endeavors should be the most aggressive investors. They should especially keep an eye peeled for small-company stocks, which can be volatile in the short term but are likelier to have a big payoff in the long run. But age should not be a barrier to investing in growth stocks. Take G.B. Mann. Now 81, he didn't get started in stocks until he was 50--and now owns a $2 million portfolio. Dolly Wageman, a Los Angeles retiree, has found success with such Baby Bells as Pacific Telesis, BellSouth, and U.S. West. They yield less than electric utilities but have greater growth potential.
Diversification is another buzzword that you might do well to ignore. The pros are certainly diversified--and that's one of the reasons they perform so poorly. They have diversified so much that frequently their portfolios are pale imitations of the Standard & Poor's 500-stock index. "You should not diversify one iota," says Peter Lynch, the famed mutual-fund manager and author of two books advocating individual investing. "There's no reason the individual shouldn't own only three or four stocks. And beyond 10 stocks, you're diminishing your returns," he says.
Where do you find them? The best route is to start with what you know. That's what Lynch calls the "insider's edge." Some investors buy stocks of companies they encounter through work, such as Atlanta printing executive Mark C. Pope III (page 6840), or Irwin Dubinsky, chief executive of Acro Plastics Corp. in Los Angeles. Dubinsky can assess a company's strength very simply--because he does business with it. "I gauge what they buy from us to determine how much growth in sales they'll have," says Dubinsky. "As orders become greater, I buy more stock."
Many smart investors find their best ideas are all around them. Investor Pat Blanco of Miami discovered her most rewarding stock, Office Depot Inc., on a shopping trip (page 6840). Jim Mulherin, a probation supervisor in Orange, Calif., invests in local companies featured in area newspapers "before an analyst picks them up and puts them on the squawk box across the country." You can even "shop" for stocks at the local mall. Albert Budlow of Bay Harbor Islands, Fla., "discovered" Winn-Dixie Stores when he visited one of its local outlets in 1985. "The meat department looks like Tiffany's, the fish department like Cartier's," says Budlow.
But you can also get a leg up through dogged research. Take Qamar U. Zaman, a physician in Cumberland, Md. Zaman has taught himself the intricacies of initial public offerings--the playpen of Wall Street insiders (page 72).
ROAD SHOWS. Many successful investors honed their skills through investment clubs. Width, a retired Seattle lumberyard owner, exemplifies this approach. At 74, he is living serenely in retirement with a half-million-dollar nest egg he built from pocket money. Investment clubs have sprouted throughout the country, largely under the aegis of the NAIC, and some have acquired an almost-professional patina. In northern New Jersey, for example, scaffolding-company executive and club aficionado Joseph Smith helps organize periodic "investors fairs" at a local hotel, inviting companies to strut their stuff before individual investors, like the "road shows" put on for professional investors.
The clubs educate their members to head off individuals' most common flaw--poor selling discipline. All too many investors take profits too early and dump losers too late. Smart investors let their profits run and only sell when stocks begin to weaken. They also act quickly to cut their losses if they have misjudged a company's prospects. But they don't sell if the stock is down because the overall market has fallen.
If it's so easy and rewarding to pick stocks, why don't more people do it? Buying stocks may seem like the most prosaic investment activity imaginable. But for the general public, it is a dying art. In 1968, some 33% of the average American's financial assets consisted of individual equities. Today, the figure is half that. According to the Securities Industry Assn., individuals now own less than half of the nation's corporate equities for the first time in history (chart, page 6337).
What happened? The rise of mutual funds is frequently offered as the main reason for the decline in stock-picking by individuals. But, more likely, the mutual-fund boom has been a result--not a cause--of the public's flight from individual stocks. Probably there is a simpler reason: fear. There's fear of stock market volatility and, more important, fear of being ripped off. Richard Hoey, chief economist at Dreyfus Corp., notes that "individual investors have often wound up the bag-holders of some of the worst ideas of well-paid financial professionals." Some penny stocks soaked the savings of as many as 20,000 small investors at a time--people who no doubt fled to the safety of certificates of deposit and money-market funds.
"DIALING FOR DOLLARS." The investing public has been discouraged from stock-picking by Wall Street itself. Big brokerage firms push "packaged products" such as mutual funds, limited partnerships, and annuities, which often have higher commissions than stock transactions and produce an ongoing stream of management fees. For most of the past decade, brokers were trained to sell "product," not stocks. It's a far cry from the days when full-service brokers were taught to emphasize individual stocks. "Today, they teach dialing for dollars," says Robert H. Stovall, president of Stovall/Twenty-first Advisers Inc. and a 40-year Wall Street veteran.
Investors who pick their own stocks can listen to their brokers--or bounce ideas off them. But the era of the hard sell has spawned a generation of jaded investors. They want to be self-reliant.
Well, it can be done. The investors profiled here represent a cornucopia of investment approaches, from buy-and-hold to junk bonds to new offerings. They are rank amateurs who have beaten the pros at the toughest game on Wall Street. Can you do the same? Read their stories on the pages that follow, and draw your own conclusion.THE INVESTOR'S PLAN OF ATTACK
DATA: BUSINESS WEEK
SET YOUR STRATEGY
Remember your main advantage: You are not an institution. All stocks are fair
game for investment--or short sale. Forget the conventional wisdom that
growth-stock investing is just for the young. Even if you are approaching
retirement, don't neglect the small-company stocks that offer the most growth
Smart investors are never off duty. Your best ideas will come from your own
backyard. Keep tabs on Wall Street research--but take it with a teaspoon of
salt. Ask companies for annual and quarterly reports as well, and subject them
to searing scrutiny.
DEPLOY YOUR ASSETS
Narrow your stock picks to a manageable number. In choosing the most promising
companies, don't worry about diversification, and don't try to time the market.
But wait until after quarterly earnings announcements to see if the latest
profit report confirms your view of the company.
Don't just buy stock and stick it in a drawer. Keep tabs. If the news starts
turning sour, and the company can't give a satisfactory explanation, sell. If
your stock is rising, don't take profits until it begins to weaken.
Gary Weiss and Jeffrey M. Laderman in New York, with bureau reports