Each quarter American companies report earnings, and we have been in the midst of one of those periods the last several weeks. On balance the reports have met expectations, which has done little to change one’s outlook for the market. There are one group of companies have reported impressive results, and these are the discount brokerage firms.
Some might wonder about the significance of this fairly small segment of the overall market. The importance is that results for this group of companies gives a good indication of what retail investors are doing.
During the first quarter of 2014 trading volume increased on average 25 percent versus the prior year for three large discount brokers. This is a clear indication that the public at large is becoming more enamored with the stock market.
Mobile phones are becoming an increased source of trading activity. The percentage of trades is now more than 10 percent for mobile at two of the firms, after being in the single digits last year.
Another development is the increased use of margin, or borrowed money for individual investors. In some cases the use of margin may make sense, in that it might be a less costly way of borrowing to expand a business, or pay down high cost debt. However, for many others it is a risky strategy, as it can increase gains, but it also has the potential to magnify losses.
We have seen this type of behavior before by individual investors. The best example was the period of the late 1990s through the first quarter of 2000. This was the dot com era, when many people bid up internet stocks to unprecedented levels, only to see those companies crash over the next couple of years.
The problem for too many people is that they see the stock market, as something to be invested in only some of the time. They think that they will be in the market when times are good, and stay out when it is not performing well.
For this strategy to work, someone needs to have the ability to time market cycles on a consistent basis. Professional money managers are seldom able to be very successful at market timing, so it is doubtful that a small amateur investor would do better.
This is why I have previously mentioned on numerous occasions that it is important to have a long-term perspective when investing in stocks. Far too many people do not reap the long-term price appreciation of the market, because they are not invested in stocks when large gains are made.
People who have just gotten back into the market in recent months, have missed out on more than a doubling in value, since the bottom in 2009. Someone with the proper long term perspective will be just as active in the market when things are bad, as well as when it is strong.
Someone still needs to monitor their investments, and have a plan on how much they will commit to stocks, bonds, real estate, or other investments. Periodically changes should be made if circumstances change, but going from having little or nothing in stocks to being an active trader is not appropriate.
The increased activity of retail investors is certainly a cautionary signal. However, the valuation of the market is more reasonable today versus 1999 and 2000. With interest rates very low, and the economy continuing to expand gradually, the environment is still conducive for the stock market to perform reasonably well.