we ain't giving in, no capitulation here
February 19, 2002
Recent Earnings, Accounting Woes
Fail to Shatter Confidence in Stocks
By AARON LUCCHETTI and CASSELL BRYAN-LOW
Staff Reporters of THE WALL STREET JOURNAL
The stock market is struggling, analysts and corporate accountants are in the dock and bankruptcies have replaced initial public offerings as the most anticipated filings of the day.
Without question, all investors -- but particularly small investors -- are feeling the pain. Since the market peak in early 2000, losses have reached 50% or more for those who bet heavily on technology stocks, and even people with more conservative holdings have had to rethink their financial prospects.
Retirements and home purchases have been delayed, college savings have been dented and almost everyone feels poorer one way or another. "There's a quiet desperation" among investors right now, says David Testa, chief investment officer at mutual-fund firm T. Rowe Price Associates.
The events of recent months have added to the funk. Questions about earnings and corporate accounting have left investors shaken, and fearful that even some of the few remaining safe stocks now sitting in their portfolios could soon blow up, or even disappear. Many wonder if any company can be trusted.
By all accounts, investors ought to be abandoning stocks. And yet, in a sign of resolve, many not only are soldiering on, but they are putting even more money into stocks.
Last month, individual investors looked past horrible Enron Corp.-related headlines and invested $20 billion of new money into stock mutual funds, according to estimates by AMG Data Services. Even in 2001, a truly miserable market year, investors overall had enough confidence to add money to their stock funds, for the 13th consecutive year.
Of course, investor optimism has been sharply ratcheted back since the end of the bull market. The new money going into stock funds in 2001 was 1/10th the amount poured into such funds the previous year. Many investors have moved to more-conservative stocks to reduce their risk exposure, and some are considering bailing out of stocks entirely.
But many of the 78 million U.S. stockholders are hanging on, despite the flood of bad news. One reason is a lack of inviting alternatives in which to move their money. But another seems to be the belief -- long preached by the investment industry -- that stocks will reward them in the end.
Here is a look at some of these investors and their thinking about the current market:
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Scared, but Staying
Despite having watched the value of his portfolio drop by as much as 30% over the last year, John Wahlers, a mortgage broker from New York's Westchester County, isn't abandoning stocks.
"It kind of scares me," he says, "but I keep saying to myself: Hang in there."
Mortgage broker John Wahlers in New York has his concerns, but isn't moving his money to cash.
While staying in stocks, the 59-year-old Mr. Wahlers has tweaked his portfolio over the past year. He sold off some of his McDonald's Corp. shares to invest in stocks he hoped would provide higher growth rates. The fast-food chain was among his first individual stock purchases in the late 1980s, along with Walt Disney Co. and insurer Aflac Inc., each of which has increased significantly and remains in his portfolio.
A decade later, he dabbled in dot-com stocks, and suffered losses as they plummeted. His portfolio, which had been valued at more than $900,000, now is worth closer to $750,000 after recovering about a third of last year's losses. Still, it was valued at only $100,000 a decade ago, and he has added about that much in new cash over the past 10 years.
Despite losing money from the sale of his holdings in WorldCom Inc., his former employer, Mr. Wahlers says he isn't tempted to move his money into cash, fearing he would lock in his losses and potentially miss the next upturn.
Besides, "you can't make any money on 2%," he says, referring to the annual returns currently offered by money-market accounts or certificates of deposit.
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Leaving Stocks, Not Funds
Gail Cox has given up on her individual stocks, but she isn't finished with the stock market.
A little more than two years ago, the 41-year-old flight attendant for American Airlines was an ardent believer in buying stocks. In late 1999, she invested about $13,000 in Qualcomm Inc. after she read about the company's wireless-telephone technology. The stock rallied, but then quickly returned to earth about a month later. "My mom kept saying 'take profits now,' " Ms. Cox recalls. But she didn't listen and sold at a 40% loss in October 2000.
In Texas, flight attendant Gail Cook is sticking with mutual funds.
As the tech companies in her brokerage account continued to plummet last year, Ms. Cox sold the rest of her stocks, including Dell Computer Corp., JDS Uniphase Corp. and AMR Corp., where she has worked since 1984. Worried about the risk of having too many financial eggs in one basket, she replaced much of the stock with bonds.
But Ms. Cox has also kept up her regular contributions to stock funds, including Dreyfus Midcap Value Fund, Fidelity Diversified International Fund and two value-oriented portfolios managed by AMR's mutual-fund affiliate. Through the funds, most of her retirement money is still in stocks.
"If you balance your money" across several funds, "you're not exposed to all this risk," says Ms. Cox, who is married with three daughters and lives in Bedford, Texas. Even if her portfolio falls by more than the 4% that it dropped last year, the investor plans to stand pat with her stock holdings.
"I've got 25 years before I retire," she says.
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Waiting for a Harvest
Dean Beeman, who runs a nectarine farm 20 miles south of Fresno, Calif., knows what it is like to have a bad year.
The 76-year-old last year lost 80% of his crop due to hailstorms, forcing him to sell $150,000 in stock to repay loans on his farm. That left Mr. Beeman and his wife, Effie, with about $1 million in their stock portfolio -- 50% lower than it was at its peak.
Because of the decline, Mr. Beeman is hesitant about putting more money into the market at the moment. "I'm still a little cautious about when all this stock is going to come back," he says.
The Beemans of California run a nectarine farm, and know about bad years; they're sticking with stocks.
Yet Mr. Beeman has no intention of deserting the market, in part because the Beemans' portfolio is still worth more than double what it was five years ago. Mr. Beeman reduced the potential damage to the portfolio by cashing in part of his technology-stock holdings in February 2000, just before the tech bubble burst. He also stayed away from dot-com shares.
His most lucrative investment has been in Intel Corp., warrants of which he purchased in 1994 at a cost of about $5.50 each on an adjusted basis, including exercising costs. He has watched the company's shares climb up to about $70 before sliding back to Friday's 4 p.m. Nasdaq Stock Market price of $32.29, but has held on to most of his Intel holdings.
As a result, "I wouldn't say my confidence hasn't been shaken" by all the market turmoil, says Mr. Beeman, but he figures he is still ahead of the game.
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A Stock Education
Robert Teis has seen the bear market from the front lines.
The 30-year-old accountant at a small firm in Grand Rapids, Mich., understands the "many games" that companies can play with their earnings. He also works with clients who have delayed their retirement plans because their portfolios have hit the skids. And in the four years he has been investing himself, he personally has made almost nothing from the stock market.
The problems of today's stock market cut close to home for Robert Teis of Michigan. He's an accountant.
"There hasn't been much profit," he says of his $15,000 in a 401(k) account. Invested in beaten-down funds like Janus Twenty Fund, Invesco Dynamics Fund and American Century Ultra Fund, the portfolio has shrunk even though Mr. Teis continues to shovel in new money. "It's kind of depressing," he says.
Some of his firm's clients have shifted from stock funds to bond funds. While it isn't a massive exodus, they are looking for cover "out of fear and nervousness," he says.
Mr. Teis himself has been jittery for months. In September, following the terrorist attacks on the U.S., he moved his whole mutual-fund portfolio into cash and bonds. "It was such a terrible event, I wanted to see where the bottom was" for stock prices, he says.
Then in October, he moved back into the same stock funds he had sold, deciding he had time on his side. He and his wife, Amanda, are now saving early for their one-year-old son's eventual college bills.
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Still the Place to Be
Bad news or not, George Vrhel sees no reason to get out of stocks now.
"In the long run, where else are you going to be?" asks the retired sociology professor, who has a current investment portfolio of about $1 million.
Granted, Mr. Vrhel doesn't expect to make much money in stocks soon. And when the gains do come, he expects to see single-digit annual returns, far less than in the 1990s, when stock prices jumped an average of 17% a year. But with bond yields so low, stocks still qualify for him as "the best game in town."
Retired professor George Vrhel is resolute about stocks.
Mr. Vrhel, 60 years old, also believes Enron's problems will lead corporations to make better disclosure of their financial results. Clearer information on corporate performance ultimately will help investors do better in the market, he believes.
Unlike some retirees, Mr. Vrhel doesn't use his investment portfolio for day-to-day spending needs. A separate university pension plan provides money for that and for his favorite hobbies: tennis, motorcycling and surfing the Internet. An investor in mutual funds for about 20 years, he plans to be in the market for the long haul, both for himself and for Lori Saunders, his 43-year-old wife.
Still, last year Mr. Vrhel hedged his bets a bit. The Sterling, Ill., investor reduced his stock holdings to 60% of his portfolio from 75%, replacing them with more defensive instruments such as Treasury inflation-indexed bonds and a real-estate investment trust.
But Mr. Vrhel says he believes too strongly in the American economy to reduce his stock holdings any more than that. "Stocks are oversold," says the investor, who has the bulk of his assets in Vanguard Total Stock Market Fund. "There's a lot of emotional selling."
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com1 and Cassell Bryan-Low at cassell.bryan-low@wsj.com2 |
