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SPECIAL REPORT: Is 'Buy and Hold' Dead? | THE LURE

'Get Rich Quicker' Is the Message, and It's Getting Through

April 11, 1999|TOM PETRUNO

Amid wild market volatility, disappointing mutual fund returns and the rise of online brokerages, more Americans are forsaking long-term stock investing for other strategies--including active trading and a shift of capital to other, safer assets. The challenge to the 'buy-and-hold' mind-set is growing, as this three-part report explains


According to Madison Avenue, here are some of the investing truths Americans should now hold to be self-evident:

* People who use discount brokerages can, in a reasonable time, expect to be successful enough to buy their own islands in exotic places.

* No full-service stock broker could possibly have your best interests in mind and, on the golf course with their buddies, such brokers have a laugh riot discussing why clients are dumb enough to do business with them.

* Hip investors actively trade stocks online and make great money doing it. Only losers or dimwits passively own mutual funds anymore.

These are the images one takes away from the current crop of TV ads for discount and online brokerages that are blitzing the airwaves. If you haven't seen one of these ads yet, you will.

The universal message is clear enough: Do it yourself, Mr. and Ms. Investor, and you'll be happier, more fulfilled and--of course--a lot richer.

You've got to be in the market and you've got to be able to move fast. But you can't trust anyone else's instincts--and why would you need to, with your discount broker, and the Internet, offering you all the necessary tools, information and trading speed?

Are they getting through to us? Apparently. Trading of individual stocks by small investors has exploded over the last few quarters. At Charles Schwab alone--the biggest discount and online broker--daily average trades totaled 167,500 in the first two months of this year, up 103% from the 1998 period.

It's not for nothing that stocks of such online firms as Ameritrade Holding, E-Trade Group and National Discount Brokers all rocketed to new highs last week.

Contrary to what the brokerages might wish, however, we have not become a nation of traders. Not yet, anyway. The surge in trading by individuals is occurring at the market's fringe, and in a relative handful of stocks--mainly Internet-related issues.

Still, extrapolate this trend and the implications get interesting to say the least.

If active trading is on the rise, and buy-and-hold investing is on the wane, the capital-raising function of markets becomes much more dicey for companies that aren't part of the hot trend du jour.

Already this year, many investment bankers have been shocked by the poor receptions for new stock offerings that don't include a in the name.

Korn/Ferry International, a veteran, profitable executive search firm, went public at $14 a share in February, and promptly fell as low as $11.

Contrast that experience with the reception for the latest new batch of Internet stocks on Friday. One of those new issues, from a start-up company called USInternetworking, soared from $21 to $57.50 by Friday's close. No earnings? No problem! One can confidently assume that few investors who bought this stock on Friday were planning to hold it very long--maybe a matter of minutes.

The extraordinary volatility of the Internet issues also raises big questions about overall market volatility in the long run. Will the continuing growth in online trading accounts, along with what is already a trigger-finger mentality on the part of many professional fund managers, turn our market into something closer to those of Third World nations?

The faster a market moves, after all, the more it feeds on itself. The risk is that nearly everybody gets a trigger finger--especially when a stock begins to tumble. If you're the last one out in a bad market that moves at light speed, your losses may be horrific.

Note that we haven't yet addressed the question of whether active trading, as a strategy, is one that most people (amateur or professional) can apply successfully. Despite the very entertaining TV ads that brokerages such as Ameritrade and Morgan Stanley Dean Witter Discover have playing these days, managing money is a tough game--and active trading is tougher still.

Maybe this is a good point at which to stop and draw some distinctions. Nobody is arguing that the rising number of individuals who can trade stocks online is, by itself, a bad thing.

Just because someone opens an online brokerage account doesn't mean that person automatically becomes a day trader or abandons a buy-and-hold investing philosophy.

John Markese, president of the Chicago-based American Assn. of Individual Investors--a group that has long championed fundamental stock research and a long-term view of things--believes that his members, typically, "are trading more. But they aren't day-trading."

Even if more investors mull the idea of active trading, Markese says, "it just doesn't fit most people's strengths to sit and monitor short-term market moves all day."

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