than a man’s hand against the sky but then with burgeoning momentum. The
most powerful impetus came from the swelling cohort of baby boomers, now
finally reaching forty years of age. Once upon a time, people told you that life
begins at forty, but in the 1990s, forty is where you begin worrying about retirement.
Suddenly a huge number of novice investors were being told to think
about investment in terms of required returns. It was the turn of the baby
boomers to start making promises, only in this case the promises were to themselves
rather than someone else. Yourself is the last person you would want to
disappoint.
Financial planners proliferated, brokerage houses doused their prospects
with seminars, and the financial press added to the cacophony of advice about
how to prepare for that terrible day of judgment, now only about twenty years
away and coming closer with every hour of the day and night. Fears about job
security in the private sector and about Social Security in the public sector only
contributed to the sense of crisis and to the magnitude of the promises that individuals
were convinced they had to make to themselves.
As a result, individuals joined the institutions in succumbing to the inevitability
that taking on risk was the only choice. To many investment neophytes,
however, “taking on risk” has meant investing in stocks, but the decision
was so fashionable and acceptable that the expression “taking on risk” has had no
substance, appearing to have little to do with the possibility that the assets might
end up well below that promised return. People were persuaded that they could
ignore volatility, because in the long run, in the long run, in the long run, in the
long run, everything would come out roses. Even though the rising stock
market in fact diminished the probability that these individuals would be able to
keep their promises to themselves, rising prices felt so good that the negative im-
plications of higher prices for prospective returns carried little weight. Anyway,
what other choice was there?
Two related points are worth mentioning as a brief digression. Both of these
items provide telling evidence of the state of mind of the individual investors.
First, I recently appeared on a panel with three financial planners plus
Martin Leibowitz of TIAA/CREF. We addressed a relatively unsophisticated
audience. After several people in the audience had used the word fun in describing
their investment activities, Leibowitz felt compelled to sound off, reminding
these individuals that they would be well-advised to approach this matter in
cold-blooded fashion rather than as a vehicle for entertainment.
Second, the public still believes that picking a few winners in a bull market,
especially risky high-tech stocks, is a certificate of brilliance in investing.
One thing leads to another. The Wall Street Journal for 16 November 1998 has
a graph showing that block trades had shrunk from 56% of total NYSE [New
York Stock Exchange] volume in 1995 to only 48% through October 1998.
Most of this loss, the Journal reports, is due to day trading by individual investors
whose heads are buried deep inside their computers and whose transactions costs
are minimized by the use of discount brokers. Fun indeed!
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