Tuesday, July 11, 2006

Main Street Investors

There are fewer individual investors today than in the past. More funds are in pension funds and mutual funds managed by the professionals. Dominic Basulto writes at TCS Daily.
"The Wall Street juggernaut's in control, and America's 95 million investors are relegated to a footnote in market history, like a museum piece no longer popular, packed away, out of sight, deep in the archive vaults."
It sounds bad. NOT.
Which all might be a bit disturbing, one supposes, if it were actually true. Does anyone really believe that citizen investors are destined to be "powerless non-entities in a land of nothingness," as Farrell suggests? That might have been the case fifty years ago -- or even twenty years ago; but today? If anything, the individual investor is more empowered than ever before. Thanks to Regulation FD, individual investors know as much as "Wall Street insiders" and have access to the same type of information as Wall Street analysts, including real-time access to conference calls and annual shareholder meetings. Moreover, thanks to the popularity of low-cost online trading platforms, it's now possible to do a formidable amount of research on any financial market in the world, all while sitting at your PC in your pajamas at two in the morning.
In the heydey fo the individual trader they were losing much of their investment to transaction costs. Even with "discount brokers" the cost is considerable. But today investors can invest in funds with very low costs, so the gain goes to the individual investor instead of his stock broker. Basulto says it well:
There are hopeful signs that the investment pendulum is swinging in favor of the citizen investor. Technology and innovation are two powerful forces that are helping to empower the citizen investor and erode some of the advantages enjoyed by large institutional investors. While technology is helping to drive down transaction costs for individual investors, innovative new solutions offer these investors a way to experience the magic of compounding returns without, as Bogle calls it, the "tyranny of compounding costs." The future of an ownership society ultimately depends on the empowerment of the citizen investor, and not the enrichment of the professional money manager.

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