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The new small investor
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April 4, 2000: 2:12 p.m. ET
Small investors keep holdings; ignore market swings, warnings from gurus
By Staff Writer Catherine Tymkiw
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NEW YORK (CNNfn) - Warnings from market gurus predicting the end of the technology boom, in addition to Nasdaq's recent plunge, are signals that many individual investors are refusing to heed.
The current approach on Wall Street is to watch the market fundamentals, including the Federal Reserve's interest rate adjustments, comments by trusted market prognosticators, and company valuations.
While individual investors do not discount the relevance of many fundamental market drivers, they are not as influenced by them and instead rely on their own research tactics and trading decisions.
"(Nasdaq) is running on pure speculation and greed. The direction is up, but how far is an exercise in futility," said Phil Ratu, a senior market analyst with Merrill Lynch. "Markets are not absolutely knowable nor are they gambling ... it's in between. There will be a time when they won't bounce back."
Monday's nearly 350-point drop in the Nasdaq, which was triggered by a plunge in the shares of Microsoft ahead of an antitrust verdict that came late Monday, caused little concern among individual investors sailing through the market on their own. In Tuesday afternoon trading, Microsoft's stock was down 5-3/8 to 85-1/2.
"It makes no difference to me," said 53-year-old Fred Walker. "It wouldn't have any impact on my investment strategy."
Another investor, 28-year-old Ala Rabadi said, "If everything else was normal and I was taking a hit, then I'd get out."
Although more seasoned Wall Street professionals are beginning to suggest that the bull's run may be nearing its end, cautioning against sinking a lot of money into the technology sector, a recent ongoing CNNfn.com poll revealed that about 45 percent of the respondents would invest in technology stocks if they had a spare $5,000 to play with. Only 16 percent said they would put the money in "old economy" blue chip stocks.
 Yet, paradoxically, despite their reluctance to shun technology issues, the CNNfn poll also showed that 53 percent of respondents thought technology stocks were overvalued.
Doing their homework
The recent market troubles were only exacerbated by the March 28 warning by influential Goldman Sachs strategist Abby Joseph Cohen, who reduced the number of technology shares in her model portfolio.
 Individual investors are not completely ignoring these warnings, but are remaining confident in their own ability to find strong companies to invest in, and appear to be undeterred by swinging stock prices.
"I'm not a market timer but it absolutely influences people," said individual investor Peter Reilly. "There are a number of forces that buffet the market, demographic trends that people have to save for retirement and technological changes."
With Nasdaq up 86 percent over the past two years, Reilly acknowledged that the rally will not last. "These types of returns are not going to be around forever. These have been extraordinary times."
But this has not stopped him from making his own investment decisions based on his own research. In the past two years, Reilly has managed to achieve a 124 percent annualized rate of return with his portfolio, which is now worth about $960,000. More than 70 percent of his investments are focused on two companies: Banyan Systems (BNYN: Research, Estimates); and Switchboard (SWBD: Research, Estimates).
A different market ahead
Analysts are predicting a broadening in market trading this year, away from the current tech-heavy dynamic. Some tech stocks are expected to bear the brunt of the shift away from the tech sector to old economy stocks.
"I think it's going to be a difficult year," said Vince Farrell, chief investment officer for Spears Benzak Salomon & Farrell. "We're undergoing a change. I think the markets will broaden and some tech stocks will suffer. In my opinion, they've reached a point of absurd valuation. These stocks are going to give up the ghost with money going into other stocks."
Some sectors to watch include; pharmaceuticals, retail, energy and financial services. While acknowledging the changing sentiment toward old economy stocks, market watchers are wary of choosing an index leader.
At the same time, individual investors are putting much of their interest into small cap stocks where they see a strong potential for growth.
"I have taken big positions in small-cap companies. There are tremendous opportunities ... to make a lot of money," said Reilly.
The Internet and the investor
So who are these new investors and what is driving their confidence? They are working, full-time professionals with a variety of jobs and differing strategies, but sharing one common thread. They do their homework online and are making informed independent investment decisions based on value.
"I'd much rather do research on up and coming companies that have potential and take the risk. It boils down to doing a lot of homework and learning the underlying fundamentals," said Walker, senior systems specialist with Transamerica Leasing in New York.
 Walker, who has been investing for the past three years and saving up for retirement, said all his decisions are based on information gleaned on the Internet, through message boards, chat rooms and sites such as Yahoo!, which allow him to research the potential viability of a new company's growth prospects.
His portfolio includes small-cap companies, such as: Dippyfoods, which trades on the over-the-counter bulletin board; and East Lost Hills, an oil and gas joint venture prospect, which trades on Canadian exchanges. East Lost Hills is owned by the following nine Canadian companies: Berkley Petroleum; Kookaburra Resources; Westminster Resources; Elk Point  Resources; Trimark Oil & Gas; Hilton Petroleum; Paramount Resources; Pyr Energy Corp.; and Richland Petroleum. But, like Reilly, he also has money in Banyan and Switchboard.
Eighteen percent of individual investors report trading via the Internet, up from 10 percent in 1998, 8 percent in 1997, and 7 percent in 1996, according to a 1999 survey by the Securities Industry Association (SIA). Of those investors with brokers, 57 percent had conducted three or more trades in the past year, with the average number of trades being 17.5 in the past year.
About 48 percent of online investors surveyed by SIA expect to increase their trading activity within the next year with a further 44 percent continuing to trade online at their current rate. Roughly 28 percent of those who have not traded online anticipate jumping into the fray in the next 12 months.
"I wouldn't go through a broker," said Rabadi, a New York-based doctor. "Everybody and their mother are opening (an online account). If there was no access to computer trading, I wouldn't be invested."
Rabadi started his online investing just six months ago but has been eyeing Wall Street since 1993. "I didn't have the money. Now I realize I wanted investments for when I get older. Mostly for the future, social security isn't going to pay for me," he told CNNfn.
Reilly concurred that the accessibility of the Internet has allowed many individuals to take their investment strategies into their own hands.
"The advent of the Internet has allowed people like myself to take an active role. The online broker and decreasing commission costs has been a major driver of that," said Reilly. "Without the Internet I don't think my strategy would have changed, but through the Internet I have more research." 
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