When the investment markets tanked five years ago, singles, families and
retirees took a beating. They watched their portfolios drop 40 percent to 75%
before the shock wore away and they were able to pull the trigger to sell off
stocks that were sliding into the abyss. The Dow Jones righted itself and
surpassed 15,000 with small investors flooding back. Memories are short when
greed bubbles, and fear of missing out on opportunities prevail.
years ago, October 2007, the Dow reached an all-time high 14,164. Six months
later the Dow was down to 11,000 on bad economic news. In September 2008, Lehman
declared bankruptcy; edacious banks pulled nearly $150 billion from money-market
funds, and the market nearly collapsed. By March 2009, the Dow was a paltry
Devastated small investors vowed, Never Again! The Wall Street
Journal interviews reported responses such as, “I hit rock bottom,” and “We just
got our brains beat in.” Fund tracker EPFR Global reported that between 2009 and
the end of 2012, small investors pulled more than $200b. from stock and
Today’s low interest rates are a facile tool of
worldwide central banks that stimulate borrowing at lower costs for economic
investment and business expansion. The Bank of Israel, eyeing a slowdown in
business activity without fear of inflation, is leading the way by lowering
borrowing costs again in September.
The downside for small investors is a
measly interest rate for their cash and the chipping away at their purchasing
When the dollar is devalued, trading them for other currencies
makes out-of-country vacation travel more expensive. The alternative for small
investors? They are back in a serious way and have returned more than $29b. into
the markets in 2012 and 2013.
Self-directed investors, teachers,
plumbers, electricians or workers in computer fields, with small amounts of
money to invest, rely on instinct and some research. Listening to the buzz about
the company shapes instinct; they listen to the talk from friends, news reports
and Internet gossip touting the industry and company products, believing they
have enough knowledge to make wise choices.
Brokers who make buy/sell
recommendations do in-depth analysis and have access to data and informant
information not easily available to the public. Their fiduciary responsibility
is to investor clients who value the recommendations of brokers to maximize
returns on stocks, mutual funds, collectables, art, coins and crops. Those
recommendations are based on information, experience, fundamental and technical
analysis without profiting from client investment decisions.
some guidelines to client/broker relations valuable for any investor in the
recently published Gale Insights Handbook of Investment Research from Gale
Cenage Learning. A research broker analyst and brokerage firm must work at arms
length and not profit or receive other benefits “from the use of the research
when clients make investment decisions.” In-house analysts are forbidden to
profit from management investment choices based on the research. Independent
analysts who sell their research must disclaim that their work constitutes an
offer or solicitation for buying and selling.
A small investor might rely
on fundamental analysis. For instance, ancient Greek speculators listened to
public complaints and followed data on starvation incidents and crop harvests to
make their fortunes by calculating supply and demand to know when to buy and
sell crops. Today, rainfall, farmer storage capabilities, truck driver strikes
and government interventions on price supports are followed carefully as
Technical analysts primarily use computers to chart prices and
market trends to determine a stock’s price. They factor in production numbers,
sales data, costs of manufacturing, consumer confidence numbers, employment
trends, inventories, new housing starts and permits, for
Regardless of the type of analysis, an investor has to know that
the broker is supplying information that is in the client’s best interests. The
US Securities and Exchange Commission fined one bank nearly $1 million for
breaching firewalls established in the firm’s written corporate manuals for not
separating the equities capital-market staff from research
Research data on new stock issues called IPOs need to be
especially transparent. Everyone wants in on the ground floor, but not all IPOs
are successful. Facebook opened at $38 per share.
Three months later the
shares sold for $19, and the company lost more than $40b. in value. Some people
knew of lock-up agreements that created downward pressure on the stock
The information was not generally shared with the
Underwriters and insiders were able to sell millions of shares
they received at near-high opening prices along with management fees. If a small
investor knows where to look, the information might be a deterrence. New
research on the digital tech industry added to the pressure that resulted in
many small investors being wiped out.
Small investors must research the
broker and brokerage firm that handles their accounts with the same tenacity
they use to look into potential investments. Know their track record, know their
equity holdings – and compare them to the recommendations.
complaints filed with the government are public record, as are complaints filed
with the New York Stock Exchange, Nasdaq and most other exchanges. Know how many
years the broker has worked and for how many different firms.
and fees can be negotiated. Do employees do research, or does the firm buy from
outside sources? Speak regularly with managers to keep abreast of the brokerage
firm’s stability and positions in the markets. This is called broker
The Gale Insights Handbook warns: “There is little hard
evidence that broker research is any more or less valuable, honest, reliable, or
transparent than research on other financial investments...Do not love
an investment because of what people say about it. Love it because of what you
understand about it.”Dr. Harold Goldmeier is the managing partner of
Goldmeier Investments LLC and an instructor of business and social policy at the
American Jewish University, Aardvark Israel Gap Year Program, Tel Aviv.