Nearly 18 months has passed since the bursting of what everyone agrees was a stock market bubble created by euphoria over the potential of the New Economy. Since March, 2000, an estimated $5 trillion in stock market wealth has vanished. Many of the people who initially enjoyed the greatest gains are the ones who've lost the most. A new class of individual investors cut their teeth on dot-com initial public offerings before moving on to speculate wildly on the growth of Internet infrastructure and telecom stocks. We all know average Joes who quickly quadrupled their money -- then lost it all as they stayed too long in the market, hoping for one more double.
Still, despite the many investors who today are no better off financially (and, in some cases, are worse off) than when they placed their first trade, the investing public as a whole has benefited from significant changes brought by the New Economy. Many of these changes -- in technology, regulation, and the culture of investing -- aren't going away. In fact, they may have altered the nature of investing for good.
GROWING APPETITE. Despite the dot-com meltdown, there's no indication that the public is losing its appetite for stocks. By 1999, the percentage of U.S. households that own stocks either directly or through mutual funds or retirement accounts had increased to 48% from 19% in 1983, according to a study conducted by the securities and fund industry trade groups. In its most recent report on family finances, the Federal Reserve Board notes that direct stock ownership by individuals increased from 15.2% in 1995 to 19.2% in 1998.
This trend seems likely to continue. The number of mutual-fund holders grew 5% in 2000 -- a year the Nasdaq posted its biggest decline ever, according to the Investment Company Institute, the trade group for mutual funds. Fund ownership has also broadened: Among householding fund owners, those earning less than $35,000 a year being the the fastest-growing segment. The share of fund-owning households in that income range grew from 28% in 1998 to 37% in 2000.
Meantime, online brokerages, such as Charles Schwab (SCH ) and Ameritrade (AMTD ), still report growing numbers of new-customer accounts, even though the trading activity in most accounts has slowed significantly. And while market values have plummeted and many investors have moved to the sidelines for now, real panic selling hasn't set in so far.
ONE MORE CUT? The growing percentage of stock-owning households has made individual investors a permanent force in the economy. The Federal Reserve Board recognizes that the wealth generated when the stock market was rising helped boost the economy, says Jay Mueller, an economist at Strong Capital Management. Now Greenspan & Co. worries that the "negative wealth effect" -- where consumers spend less because they've seen their net worth drop due to stock-market losses -- will slow or stall economic recovery. That's one reason the Fed is expected to cut short-term interest rates at least one more time this year.
Other folks in Washington are also paying more attention to the small investor. Congress has changed tax laws to increase allowable contributions to tax-deferred retirement accounts and is considering a bill to allow some fund holders to defer capital gains. At the same time, the Securities & Exchange Commission is pressuring public companies to do a better job of communicating with small shareholders. Last year it passed Regulation Fair Disclosure, which requires companies to release important news -- such as earnings guidance -- to the public at large, and not just to a few select analysts.
It's the Internet itself, however, that has done the most to level the playing field between Wall Street and the individual investor. "In the old days, we had an elite club that got all the information first," says Margaret Patel, portfolio manager at Pioneer Investments. "The Internet makes investing democratic."
FREE INFO. Now ordinary folks have access to breaking news, real-time quotes, and after-hours trading via the Web -- all formerly available only to professional investors. Individuals can trade at high speed, listen in alongside analysts on conference calls with company managements, and tap into sophisticated research from their computers. "A lot of the information that an individual would need to make a well-educated decision on what to invest in is available for free," says Peter Cohan, author of E-Stocks. That, too, is going to continue, even though the stock market bubble has burst.
The Internet has also encouraged the free exchange of ideas and information (not all of it accurate or honest, or course) between nonprofessional investors, which can give small shareholders real power over stocks. Information posted on chat boards can still move a company's shares.
For instance, "whisper numbers," where individuals second-guess analysts and come up with their own earnings estimates, continue to be a force in trading. "People are doing their own homework and are submitting their own analysis," says Paul Hauck, co-CEO of WhisperNumber.com, a site that collects this information. Although whispering is nearly as frenetic as ever, he says, it's now spread out over a broader group of stocks.
Thanks to the free flow of information, investing has become a higher-speed game -- and that's here to stay, too. When a company has good news to report, the stock moves fast. "Information is disseminated so quickly that themes get played out in a shorter time frame," says Patel.
FEWER CLUBS. Of course, some New Economy trends have proved fleeting. Cohan notes that investors are suddenly much more serious about investing -- meaning that there's less cocktail party chatter or bragging about stock picks among acquaintances. A clear sign that investing is less of a social activity: The number of investment clubs has declined from a peak of 37,000 in April, 1998, to 33,500 now, a fact included in a recent Prudential Financial report.
Another dashed concept: That stocks only go up. Many former aficionados of momentum investing now know better, though some are still learning the lesson. "There are undoubtedly some people who had unrealistic expectations," says Mueller. "We're probably going through a period where investors are getting more realistic about the kinds of returns they can get in the future."
With momentum out of the picture, Internet stocks are back to trading on fundamentals -- such as sales growth and earnings -- instead of on wacky "metrics" such as the number of unique users or monthly page views a Web site boasts. Patel also notes that the IPO boom has gone bust. "People learned not to invest in tiny startups with no profits," she says. "That was just one little excess that has come and gone."
NO STREET CRED. Perhaps the most significant change is that Wall Street has lost much of its credibility with the passage of the New Economy's heyday. Instead of being regarded as idols, prominent Internet analysts such as Henry Blodget of Merrill Lynch are now being sued by investors who listened to their advice. And Wall Street firms have been pressured to disclose conflicts of interest that color the recommendations of their research divisions.
Many money-management firms hope that more individuals will seek out professional advice now that they've learned how challenging investing is. But Cohan thinks that individuals may actually have a different perspective -- that they aren't so dumb after all. He thinks they'll be less willing to give credence to "experts" on TV or to hand over their hard-earned money to a stock broker or financial planner. "I think people will continue to take more responsibility for their own decisions, rather than relying on an analyst or a talking head to tell them what to do," he says.
Investing may never be so fun for ordinary folks again. But that doesn't mean they're giving it up. For humbler but wiser individual investors, the New Economy has tilted the balance on Wall Street in their favor. And that isn't likely to change.
By Amey Stone in New York