On Retail Investors.

Excellent article by Dave Merkel over at alephblog.com/ regarding individuals and the stock market.  {Excerpt with my highlights}

{Dave has} seen a spate of articles lately on retail investors abandoning the stock market. Here’s a sampling:

1. Cult Figures — Bill Gross
2. Stock bulls have a beef with Bill Gross — Jonathan Burton
3. Why Are Investors Fleeing Equities? Hint: It’s Not the Computers — Andrew Ross Sorkin
4. Small investors vs high-speed traders — Felix Salmon
5. AMERICAN IDLE: FIVE REASONS WE HATE THE STOCK MARKET — Josh Brown

I chose these because I think they add to the discussion.  In general, I think there are a decent number of retail investors, that have left the markets, or reduced their exposure.....After 2008, more people concluded the stock market was rigged.  Why?  Because they lost money, and that couldn’t be their fault.  Sorry, but retail investors, and many professionals too, give way to fear and greed, and chase trends.  They are not invested at the bottom, because they are too scared.  They are invested at the top, because it is the “thing to do if you want to make money.”

Call my point 1 this: People who don’t understand investing buy and sell at the wrong times.  They panic and get greedy.

Point 2:   People don’t get that returns are lumpy.  They happen in spurts, over months, years, decades.  This is the big problem with financial planners — they assume smooth returns that will assure a retirement.  Sorry, but market moves in regimes, and is not easily predictable.  There are a few two decade periods where the market goes nowhere.  They are not anomalies; the value of companies are catching up to their prices.

Point 3: The estimates of equity outperformance sold by consultants, financial planners and naive journalists exaggerate the reality.  Here’s the reality: equities perform maybe 1% better than Baa/BBB bonds, particularly when you analyze the investments on a dollar-weighted basis.

Point 4: Everyone loves a winner.  People were spoiled by the returns of the 80s and 90s, and that validated in their minds the idea that more stocks are better; the projections of the financial planners are conservative; equities always beat bonds.

Point 5: Most ignore long-term valuation metrics, whether professionals or retail. .....{T}hey say roughly the same thing at present: equities are overvalued long-term.  Short-term is another matter: P/Es aren’t that high and momentum is running.  But how short is your horizon?  This makes sense if you are willing to play for months, not years.

Point 6: Professionals changed too.  In this market environment many professionals have started to trade more, as if we don’t trade too much already, and I think this is the wrong response.......  

Point 7: But regardless of who holds stocks, they are still held by some entity.  They don’t disappear.  They move from weak hands to strong hands.  The trouble for retail investors is that they are weak hands on average.  They can’t handle disappointment, versus value investors who buy when there is disappointment.....

.....Personally I don’t think that retail investors are abnormally disappointed at present.  This is just market noise — we face overvaluation, but positive momentum.

Me?  I keep owning undervalued companies for myself and clients.

Link:  Retail Investors and the Stock Market

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