May 16, 1999
New Breeds of Investors, All Beguiled by the
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By SAUL HANSELL
here is a myth that most of the people trading on the Internet are like
Spyridon Ganas. Since opening an account with E*Trade on his 18th
birthday in January, Ganas has taken to Web trading with a
vengeance, betting not just on volatile technology stocks, but on the even
more volatile options on technology stocks. A long-term investment is one
he holds for more than a day or two.
"I'm part of the Internet generation," said Ganas, a high school senior in
Shrewsbury, Mass., "and it was more natural for me to use the Internet for
investing."
Looking at the madcap market these
days, especially the gyrations in
shares of technology and Internet
companies, it is natural to wonder
whether the dominant investor is in
fact some sort of recent Nintendo
graduate who has wired his joystick
right into his brokerage account.
But the phenomenon is far broader
than the day traders who have made
online investing almost a full-time
pursuit. The number of households
with people trading on the Internet
has nearly tripled, to 6.3 million in
the last 16 months, according to
NFO Worldwide, a research firm based in Greenwich, Conn., that regularly
surveys online investors and other Internet users.
An even more impressive number of households -- 20 million -- tap into the
Internet for investment news, quotes and ideas, NFO surveys have found.
To understand more about who is using the Internet for investing and how it
is changing what they do with their money, Money & Business asked NFO to
assemble focus groups of active online traders, occasional online traders and
the larger group of investors who glean information from the Web but do
not trade on line.
Fittingly, the discussions occurred not in person but in a special chat room
on the Internet, where the 35 participants could read and respond to
questions posed by a reporter as well as the answers they typed in.
While these people represented a wide range of ages, incomes, investment
philosophies and behaviors, a common thread emerged: The Internet has
bolstered their confidence about investing and emboldened them to take
greater risks.
"I feel a little more daring, now that I'm a better-educated investor," wrote
Dorothy Brown, 52, of Morgantown, W.Va. She had mainly favored bond
investments, but she shifted funds into stocks after trying trading at Charles
Schwab's Web site.
In the focus groups as well as in follow-up interviews, the participants said
they felt increasingly secure about their investment decisions as they used the
Internet to monitor their portfolios, follow news about their holdings and
track the comments of other investors.
Those who trade on line said they felt empowered by the minute-to-minute
control that Internet investing allows -- and liberated from the
intermediaries who have guided them in the past, like stockbrokers and
mutual fund companies.
"With online trading, the easy
access to the market is driving
people to trade more, driving
their confidence level up, raising
their risk tolerance," said Lee
Smith, a vice president in NFO's
Internet research division. "They
are holding stocks for a shorter
period of time and holding stocks
more than mutual funds."
If the trends hold, they will begin
to alter the composition of
America's retirement nest egg and
the landscape of financing
available to American businesses.
They already have Wall Street in
a tizzy, as traditional brokerage
firms and stock markets confront
upstarts and a few established
players that have been quicker to
latch onto new trading
technologies. Even longtime
professional traders now face a
powerful new market mover.
"In the market's run from 3,000
to 8,000, a lot of the upward
movement had to do with the fact
that people were invested in
mutual funds and were not apt to
sell very quickly," said Charles
Geisst, a finance professor at
Manhattan College in the Bronx.
"It's no coincidence that in the last
year and a half, as Internet
trading has become more
common, the market has become
more volatile."
Only after a number of years -- including a couple of serious bear markets
-- will it be clear whether the newfound confidence and self-reliance of so
many online investors is justified. What is already clear is that a big and
growing group of Americans are engaged in a high-stakes experiment to see
whether they have been prudent in betting their future on stocks they trade
themselves.
Perhaps the Internet's most significant impact on investing -- evident in the
fast growth of online trading volume and the increasing volatility in the
markets -- is how it emboldens many investors to trade stocks more often.
NFO's surveys have found that among investors who have been trading on
line for less than a year, 16 percent are what it calls heavy traders, those
who say they have conducted more than 10 trades in the last six months. But
of Web investors who have had online accounts for more than a year, 30
percent are heavy traders.
That's not only because active traders were first to jump on line. An NFO
survey found that only 13 percent of investors who started trading in 1997
were heavy traders back then.
Many of the focus group participants said that their experiences matched the
surveys' findings about the seductions of the Web.
"I trade more often, because it is easier and can be done 24 hours a day,"
wrote James Moyer, 45, of Elma, N.Y. "If a stock is moving -- up or down
-- I am aware of it on a daily basis, and can sooner decide it is time to buy
or sell. I don't have to fumble through a newspaper or an end-of-month
report from my account."
any said they were trading more often because they were using the
Internet -- often at their jobs -- to watch prices throughout the day.
That offers the temptation to pounce the moment they see reasons to
hop in or out of a stock, though even some who do so are ambivalent about
the merits of such trading.
"I do trade more than when a trade cost more than $8," said Treg Owings,
41, of Madras, Ore., who said he checked his portfolio often during the day.
"You might trade something because it looks like it is dropping, and the next
minute it is up $5. The cost of trading with a broker might discourage
in-and-out trading and might save some people money in the long run."
Many people are relying less and
less on traditional sources of
guidance, like brokers and mutual
funds, as they actively trade stocks
in their Internet accounts.
"I do not miss the frustration of the
broker trying to sell you
something," said Bev Waldrip, a
retired customer service
representative for BellSouth who
lives in Blairsville, Ga. "They do
not understand the word 'no."'
Indeed, NFO, whose research
clients are mainly financial services concerns, is finding that Web trading is
becoming much more of a threat to the big, full-service brokerage firms like
Merrill Lynch and Paine Webber, which often charge commissions 10 times
higher than those at the online firms but provide access to a broker for
advice.
"It used to be that the bulk of online investors came from the discount
brokers, because they are more comfortable making independent decisions,"
Smith of NFO said. "Now, transfers from full service are starting to grow as
people realize that all the information they see on line makes them less
dependent on their brokers."
Similarly, the infatuation with online stock trading threatens to halt the
two-decade-long shift of investment assets out of individual securities and
into mutual funds.
"I would rather manage my own 'fund,"' said Thomas Holycross, 68, of
White Lake, Mich., who opened an account 10 years ago with what is now
DLJ Direct, the discount unit of Donaldson, Lufkin & Jenrette.
Charley Kashou of Mequon, Wis., says he is putting less into mutual funds
now. "I've been doing too well in stocks to put it in funds," he said.
One of the most striking aspects of the focus groups was how important the
Internet has become even to investors who have never placed a trade on line.
"The Internet is speeeeeeeeeeeeeed," wrote Leo Lomasney, 62, a longtime
investor from Rochester, N.H., who said he was too lazy to learn how to
trade on line. "The Internet has allowed us poor people access to the
information that the brokers used to own," he added, explaining that he uses
several Internet sites to get investment ideas.
Jerry White, 52, a semiretired engineering executive in Ferndale, Calif.,
checks the value of his portfolio on line every day, reads investing news on
the Web and occasionally ventures onto message boards to see what others
are saying. He is trading more often, he said, because the Internet gives him
more ideas.
Still, he feels more comfortable trading through the Morgan Stanley Dean
Witter broker who has an office near his home and with whom he can
compare notes. "I'm making faster choices," White said. "I'm still not sure
they are better choices."
The many message boards and chat
rooms where users share ideas
about investments with one another
are, of course, the most
controversial sources of investing
information on the Web.
The Securities and Exchange
Commission has highlighted these
sites as fertile breeding grounds for
fraud. And a substantial number of
Web investors simply have no use
for stock tips from strangers.
"I don't use the message boards or
chat rooms -- they are too large and time-consuming for my needs," said
Moyer of Elma, N.Y. "I know what I'm looking for and go to more reliable
sources than what an anonymous Net user has to say."
Ganis, the youngest participant in any of the focus groups, takes an even
more cynical view. "Message boards can't be trusted," he said, "but they're
useful if you want to hype a stock you just bought."
By contrast, Ms. Waldrip, the former BellSouth employee, who is 57, said
she had had good luck with online investment tips. Someone she met in a
chat room on America Online suggested buying the stock of Home Depot, an
investment with which she has been happy.
While several people in the focus groups reported bad experiences with tips
on line, many said the message boards still had allure.
"I lost a lot when I was new to them; I believed people," said Kashou, the
Wisconsin investor. Yet even though the boards are populated by "a lot of
hypesters," he added, he continues to read them, because "occasionally I find
a good idea."
Besides, many investors said, traditional sources of investing information
just seem anachronistic in the Internet era. "If I read the paper, the
opportunities to strike are already gone," said Thomas Fitzgerald, 33, of
King of Prussia, Pa. "It is always old news after you have been on the Net."
s people become comfortable using the Internet for investing
information, the principal lure to leap into trading on line is the very
low commissions of the online brokers. But the focus group
participants said that as they experimented with online trading, what they
liked best was the sense of control it gave them.
"Price is a big factor, but that alone wouldn't do it," said Mary Hill, 49, of
Salinas, Calif. "On-line trading is easy, always available, and I don't have to
listen to someone try to tell me what they think," she said.
Most of the focus group participants were satisfied with their online trading
experiences, though a few complained of being stymied by the occasional
computer glitches that have kept big online brokers like Charles Schwab and
E*Trade from processing orders.
"I've had trouble getting on a couple times," said Wendall Sherk, 34, of
Florissant, Mo. "But brokers don't answer their phones at bad times, too, so
that's no different."
Jennifer Crissey, 32, of Milford, Pa., was not so sanguine. "I have had
problems with orders not going through or the Web site being down with
Schwab," she said. "This has prompted me to switch many of my accounts"
to another online broker.
NFO's surveys have found that about 22
percent of online investors have switched
their Internet broker at least once. But most
have moved for lower prices or better
investing features, with only 14 percent of
the switchers citing complaints about service
or computer problems.
Still, highly publicized computer glitches at
most of the major online brokers have
discouraged some people from trying online
trading.
Mike Carlson, 48, of Aurora, Colo., said
that his family had been planning to move
some mutual funds to an online brokerage
account, but that the recent problems at
online trading sites "caused us to back off."
Presumably, the best measure of the value of
any investing tool is how well a portfolio
performs. Many focus group participants
said they thought that going on line had
made them more successful investors,
though some had lingering doubts.
Robert Grisinger, 47, of Junction City,
Kan., said his return has been higher, "but
that could be because it seems the market is
booming and hasn't taken a good crash
lately."
Another reason that online investors cite for
their having done well is their eager buying
of the stock of Internet companies -- the
hottest, if the most volatile, sector of the
market recently.
"I am taking advantage of the Internet
explosion," said Fitzgerald of King of
Prussia. "It's a wild ride, but returns are big
if you play it right."
Professional traders have long observed that
a large part of the activity in Internet stocks
comes from small orders entered through
online brokers. And a Gallup survey for
Paine Webber earlier this year showed that
44 percent of online traders have invested in Internet stocks, compared with
15 percent of investors over all.
Still, a lot of participants said the Internet stock ride was just too wild for
their tastes.
"I braved into Internet stocks about a year ago, bought Lycos and sold it
four days later at a $500 profit," recalled Moyer, the New Yorker. "The
reward was great, but the trauma was awful. I haven't bought an Internet
stock since."
Even among more active traders, there is a widespread feeling that the wave
of Internet investing will soon crest.
"I think online trading has spurred part of the new high record prices and is
spurring them on," Moyer said. "If the market takes a downturn, it may be a
really big one, as people won't ride out the storm."
Indeed, like investors through the ages, the Internet traders are more
concerned about how other investors will behave than about their own
investing.
"It is like driving," said Owings, the Oregon investor, who is proud of his
purchase of technology stocks like Dell Computer and Ebay. "You have to
worry about the other guy."
Another focus group member, Dean Coston, 75, who was deputy under
secretary of Health, Education and Welfare in the 1960s and is now retired,
pointed the finger at the generation of beginning investors.
"The thing that concerns me is all the younger investors who have never
experienced anything but a rising market," said Coston, of Falls Church, Va.
"They don't know that what goes up will come down. It will be terrible for
them."
But to Spyridon Ganas, the high school senior who trades options in
technology stocks on line, the beauty of the Internet is that it lets him take
advantage of what he considers the folly of his elders.
"The baby boomers think the stocks are worth it," he said. "So I might as
well ride the wave." |
