Review & Outlook

Our take on the investing, financial, & economic themes of the day

Is this a Golden Age for Investors?

5 March, 2012 by Ben O'Brien in Commentary

There has been some heated debate recently over the state of the individual investor. This is undoubtedly a difficult time for small investors. There has been the “Lost Decade” for stocks, and now the “War on Savers,” as critics of the Federal Reserve Board call the Fed’s program to keep interest rates low for several more years. From Occupy Wall Street to the Tea Party there has been a growing perception that the deck is stacked against the little guy. Despite all of this some of the leading lights in the financial world are now calling this a golden age for small investors. So which is it?

From a mechanical point of view, it’s a lot easier to be informed than it used to be. The author of popular finance blog “Abnormal Returns”, Tadas Viskanta argues, “There has never been a better time to be an individual investor.” His blog post on the subject set off a firestorm of debate. According to his argument technology has transformed investing. Despite the many looming macroeconomic worries, investing is cheaper, easier and more transparent than ever. Viskanta writes, “Never before have investors had access to data, analysis, opinion and social tools that are commonplace today.”  He goes on to list the financial innovations, from exchange-traded funds to new social media tools that have made investing increasingly inexpensive and accessible to amateurs.

Jason Zweig, the prominent Wall Street Journal columnist, weighed in on the debate with a story of his first stock purchase as a teenager in the 1970’s. Then, the only source of information on the company was writing away in the mail for the company annual report or else a trip to the public library to wade through large, dusty investment guides. Once he bought a stock, he faced commissions of up to 50% of his earnings, and was so disgusted by the whole process he didn’t but another share for years.

Zweig’s anecdote pretty well settles the debate. Leaving the state of the market aside for the moment, things are pretty good for investors these days. The internet offers vast amounts of free information that only recently was available only at great cost to professionals.

The ease of making trades with a few clicks and the enormous amount of free information out there, however, comes with its own threats. As Viskanta warns, many innovations are a “double-edged sword” and should be avoided. Despite the technological advances, we still have “innate behavioral biases” that give us a tendency go with the crowd and to buy high and sell low. As Zweig puts it, “Yes, Wall Street is still a dangerous place. But it used to be worse.”

Ben O’Brien