Blaming the Investor—She's a Pig
Challenged to explain the losses taken by small investors in the aftermath of the bubble, investment professionals point to the investors themselves.
Writing at the height of the market, and with commendable recognition that the market was overvalued and in danger of decline, Robert Shiller commented, “The market is high because of the combined effect of indifferent thinking by millions of people, very few of whom feel the need to perform careful research… and who are motivated substantially by their own emotions, random attentions and perceptions of conventional wisdom.”[77]
Writing after the market had collapsed, a major business magazine reported, “Experienced money managers say the lesson to draw from the Net bust is that investors need to do their own homework and not just rely on the experts.”[78]
Business magazines also blame investors. 'We think most of the shareholder class actions against technology firms amount to nothing more than a desperate attempt by investors to recoup money they mismanaged.”[79]
An old stock market adage has been brought out, dusted off, and offered as a profound judgment: “Bulls make money, bears make money, but pigs get slaughtered.” In a sense this is unobjectionable, but when it's cited about the bubble, it suggests that the retail investor who got slaughtered in the market did so because she or he was a pig.
This is financial market Darwinism—survival of the fittest. Taken to its logical conclusion, it holds that professionals can take advantage of nonprofessionals in various ways, including by not giving them honest information. As such, it's a point of view that has been rejected by several decades of bringing greater transparency to financial markets and thereby increasing public participation in the market. Finally, by blaming the small investor for being taken advantage of, market Darwinism is also grossly unfair.
In fact, financial professionals urge small investors not to try to out-trade the market. An ad placed in magazines directed at the general reader (including Natural History, November 2001) by one of the larger mutual fund companies (TIAA/CREF) exemplifies the position taken by the financial services industry. Under a photo of Albert Einstein is text reading “…when it came to things like money he never wasted time thinking about it. That's where we came in, the people with over eighty years of experience…” This advertisement makes explicit what is implicit in almost every relationship between a financial services company and a small investor—that the retail investor entrusts his or her money to the company to manage it so that the retail investor can benefit from the full-time attention, experience, and know-how that the professional possesses and the retail investor does not. The only exception to this arrangement involves the active investors, including day-traders. But such people are a small minority of retail investors. For financial service firms to then assert, or accept the assertion when it's made by others—including some academicians—that retail investors' losses are because they failed to more actively manage their investments is disingenuous.
Investment professionals who advise retail investors to not trust investment professionals but to themselves study potential investments in detail are disingenuous. In reality, only a professional can do what a professional calls careful research—too much critical information is obscured or hidden in the accounts of firms, too little information about prospective business is available, and too little time and expertise is available to the average investor. This is why an industry of professionals exists to support the nonprofessional investor. Unfortunately, this industry is too often predatory regarding its clients. In the dot-com and telecom bubble, major investment banks had huge conflicts of interest by which stock analysts, giving advice to investors, were in fact being paid for making recommendations helpful, not to investors, but to the companies and banks involved.
Nor could the public rely on so-called experts in the new economy. For example, the era spawned a new sort of firm allegedly expert in the development of businesses that developed and applied the new technology—the incubators. The executives of the incubators were supposedly experts about business in the new economy. Stock in the incubators themselves was sometimes sold to the public, including David Wetherell's CMGI, Internet Capital Group, and Bill Gross's Idealab. In fact, the fingerprints of the men who led the largest incubators are all over the dot-com bubble.
Wetherell got his early experience as the head of the College Marketing Group, a marketer of college courses and faculty information. In the mid-1990s, he remade the company into the country's first major incubator for start-ups. During the Internet boom, seven CMGI companies went public, raising $647.2 million. CMGI scored early hits, including its investment in search engine Lycos. With the collapse of the bubble, both CMGI and most of its public companies were of little value. Thus, the very people who were supposedly the experts on the new economy turned out to be merely another group of people building and exploiting the mania, and in the end the shares of the incubators collapsed as fully as those of the dot-coms they nurtured.
Nor are those who blame the public for the bubble entirely candid about the hysteria, which they suggest somehow emerged from retail investors like fire from spontaneous combustion. In fact, years of hype participated in by venture firms, entrepreneurs, angel investors, investment banks, brokerage houses, and much of the media set the fire of hysteria in the investing public.
Another investment professional wrote in The New York Times that Americans are demanding to know what happened to them in the bubble, and he gave an answer—they were fools who wanted to be deceived and they got what they deserved. Here are his exact words, “The truth is simple: there was a boom… Booms begin in reality and rise to fantasy… Were investors out of their minds?… Investors are right to resent Wall Street for its conflicts of interest and to upbraid Alan Greenspan for his wide-eyed embrace of the so-called productivity miracle. But the underlying source of recurring cycles in any economy is the average human being… The world wants to be deceived, therefore let it be deceived.”[80]
To me, blaming investors for the bubble is like blaming a patient for not diagnosing his own illness and prescribing his own medicine. Instead, when we go to a doctor, we pay him or her for expert advice. Should we second-guess the doctor? Maybe occasionally, on serious issues, when we might seek a second opinion, but if three doctors tell us the same thing and they are the experts, it really shouldn't be necessary for us to go on our own to read medical texts and figure out whether they are right. In fact, in our society, if the doctors are wrong, and we are injured as a result, we can sue them, and be compensated.
Similarly, financial markets are full of well-compensated professionals who purport to advise the retail investor, and some of whom have legal obligations toward their retail clients. It's not reasonable to blame the retail investor for not acting as if she were the professional herself.