Crains New York Business: Baby Bulls Put Stock in Market
Novice investors hope to cash in on the soaring Dow, but are they too late?
By Aaron Elstein
Crain’s New York Business
January 11, 2015
Business is booming at the Online Trading Academy, a place where novice investors can learn to swim with Wall Street's sharks.
"You can do better than the market," proclaimed Education Director Bill Snell, a former Morgan Stanley financial adviser. "It's easy to do when you understand how."
So many baby bulls are registering that Online Trading Academy is looking to double classroom space in its lower Manhattan office. The classes don't come cheaply—up to $60,000 for the most advanced levels—but with the Dow Jones industrial average flirting with record highs, more individuals are finding the stock market's siren call irresistible.
"People feel like they're missing out if they're not in the stock market now," said instructor Chuck Fulkerson.
The numbers certainly bear that out. Last week, the American Association of Individual Investors reported that its members are the most heavily invested in stocks since June 2007 and are holding less cash than at any time since 2000. In November, retail investors poured a record $41 billion into exchange-traded funds that focus on stocks, according to research firm ETFGI. MarketPsych, a firm that tracks activity on Twitter and other such media, said bullish chatter online late last year hit even higher levels than in 2007.
It's not just the new kids on the block buzzed by the market for the first time in years. More-seasoned investors are also feeling the love. Thorne Perkin, president of Papamarkou Wellner Asset Management, a firm that manages $3 billion for wealthy families, said he's expecting U.S. stocks to return 6% to 8% this year, which would be only about half of last year's gain but enough to sustain a bull market that has run since 2009.
Has market peaked?
"I wouldn't say equities are cheap, but they're fairly valued, and many bonds are overpriced," Mr. Perkin said.
With an eye toward the Wall Street adage about feeding the ducks when they're quacking, many of the financial world's more august institutions are availing themselves to individuals. KKR, for instance, last year allowed investors to get exposure to its private-equity funds by putting down as little as $10,000. Activist Bill Ackman launched a publicly traded vehicle that offers average folks a chance to ride along with his Pershing Square hedge fund.
At the same time, however, individuals' renewed infatuation with stocks is a strong sign the market has peaked. The AAII notes on its website that over the years investors have profited by selling stocks precisely when its members are most ebullient. Of course, by no means are all individual investors exuberant.
At a gathering last week of the New York Investing Meetup, organizer Daryl Montgomery advised the audience of approximately 80—most of whom appeared to be attending for the first time—that the best buys this year will be oil and silver. Mr. Montgomery, who wrote a book called Inflation Smart: Profitable Investing When Money Devalues, likened U.S. stocks to shares in Argentina, a country riddled with rising inflation, debt problems and a stock market that's lost a third of its value since the start of October.
"When stocks do well, it doesn't necessarily mean the economy is strong," Mr. Montgomery told the crowd. "It could mean disaster. Look at Argentina and, from that, you could look at the U.S."
Online Trading Academy's Mr. Snell agrees that U.S. stocks look pricey. His instructors teach students to protect against downturns by examining trading patterns to divine where stocks, futures or currencies will go next. The idea is to figure out where incomplete buy or sell orders exist at places like Goldman Sachs or Merrill Lynch and build a position before the big fish make their move.
It's not a strategy for the faint of heart. Mr. Snell said he doesn't know how many graduates go on to become successful investors.
"We teach everyone from day-traders to investors," said Mr. Snell, defining an investor as anyone who holds a position for more than four weeks. "We offer lifelong learning."
That may be so, but the learning curve can be steep.
At a recent class, an instructor showed a group of seven men and one woman how to profit from a trade involving U.S. and Canadian dollars. All worked well enough until the monthly unemployment report came out and the trade suddenly turned into a loser. Fortunately, the instructor said, he has a U.S. dollar-denominated bank account in Canada that gained value even as his trade lost money.
"Does anyone know what a hedge is?" the instructor asked. No, the students murmured.
"Hedge is protection," the instructor said. "After three days here, you'll understand."
A version of this article appears in the January 12, 2015, print issue of Crain's New York Business.