We weren’t referring to today’s meme-stock investors, but we could have been.
On Wall Street, “everyone picks on the little fellow,” Barron’s wrote on July 19, 1965, when, like now, growing numbers of retail investors were upsetting the professionals’ strategies.
“The way grizzled tape-watchers see it,” we wrote, “odd-lotters never cash in profits or liquidate positions as their affluent counterparts do; rather, they ‘panic.’”
Wall Street has never had a high opinion of retail investors. The big banks like taking their cash, of course, but sometimes these little fellows do unexpected things—like bidding up
GameStop stock (ticker: GME) 1,500% in two weeks last January.
The meme-stock phenomenon has made some investors rich and broken others, while the crushing of shorts has forced Wall Street to alter its tactics. How will it all end? Here are some hints from the past.
The 1920s roared in part because market participation boomed, as a new industry of brokerages let small investors buy equities with borrowed funds. Investors put down “a fraction of the price, typically 10%,” according to a Federal Reserve study, with the stocks serving as collateral.
As brokers’ loans surged, the Fed raised interest rates in August 1929 to cool speculation. It had little effect. On Oct. 21, according to the Trader column, margin debt was nearing a record set in March 1926, which had been followed by “a drastic public liquidation.”
That liquidation was nothing like the one that started three days after that column hit print. From 305.85 on Oct. 24, 1929, the Dow tumbled to 41.22 on July 8, 1932. The 1929 high wasn’t regained until 1954.
The very next year, Barron’s worried that stocks had “recaptured something of their old-time glamor in the eyes of the public.”
In a Jan. 3, 1955, column headlined “Lambs in the Street,” we noted the “danger that too many people with neither the proper knowledge nor the means will be tempted to try their luck in the market. Should that happen, if the past be any guide, it can only lead to the most unpleasant consequences.”
Many did try their luck. One way was through mutual funds, which had been around since 1924 but lost their luster after the 1929 Crash. With added investor safeguards, they became increasingly popular in the 1960s.
Another was through “investment clubs,” in which neighbors or co-workers pooled their money and invested together. In 1965, Barron’s estimated there were 37,000 such clubs in the U.S., “up from 25,000 five years ago.” These were the “neophyte investors” we worried about back in ‘55.
Yet a July 19, 1965, article—cheekily headlined “No Lambs in the Street”—reported that investment clubs were “gaining increasing market know-how.” They showed a fondness for blue chips, the most-purchased stocks being
AT&T (T), Chrysler,
General Motors GM), RCA, and
BM), followed by the likes of
Ford Motor (F), 3M (MMM),
Xerox (XRX), and
Around this same time, Barron’s noted that mutual funds were packing their portfolios with “glamour stocks,” many of the same ones favored by the investment clubs, as well as such titans as
Johnson & Johnson (JNJ),
Eastman Kodak (KDK), and
Thus was born the so-called Nifty Fifty, which, when combined with a “buy and hold” strategy, helped produce unjustifiably high valuations for many of these companies. The recessions of the early ‘70s burst the bubble. By July ‘74, the Nifty Fifty was “known as the Dirty Thirty,” according to Barron’s.
Retail investors returned in the ‘80s and were a contributing factor in the Black Monday crash on Oct. 19, 1987. But they really made their presence felt as “day traders” during the dot-com era.
Originally named for investors who simply opened and closed positions the same day, day traders by the late ‘90s had been organized into armies of split-second market timers.
“The goal: to ride stocks up a quarter-, half- or full point—and quickly punch out of the position with a profit,” Barron’s wrote in the March 1, 1999, issue. “Not exactly the kind of thing that Warren Buffett favors.”
The problem: Stocks don’t always go up. Plus, there was the $5,000 one firm charged for training, and the $50,000 minimum to open a trading account. Then there were commissions, which, at $25 a trade, added up.
“At the end of two years, I gained $25,000 in trading profits, but paid commission fees of $100,000; the commissions just ate up my profits and killed me,” one day trader told Barron’s in the Sept. 13, 1999, issue.
Many suffered similar fates. How much day trading contributed to the dot-com bubble is debated, but those who managed to stick it out a few more months surely wish they hadn’t.
Like the grizzled tape-watchers of yore, some of today’s pros are dismissive of meme traders and tactics like “diamond hands.” But, for now at least, Wall Street will have to coexist with this new generation of little fellows.
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