He Is Getting Smarter and More Active

THE SMALL INVESTOR

THE number of Americans who own stock has increased an estimated 1,000,000 in the past two years, bringing the total to about 7,500,000. At least half of them, say brokers, are small investors. Since they frequently buy their stock, in odd lots (less than 100 shares), Wall Streeters regard odd-lot purchases and sales as one of the best measures of what the small investor is doing.

In the current bull market, the new small investors expect to make money. But will they? One of Wall Street's oldest saws is that small investors are wrong most of the time; they buy stocks when prices are high and sell when prices fall. But in recent years, market experts who have taken pains to study the actions of the little investor think that the old saw is wrong. One such expert is Boston's Garfield A. Drew, proprietor of an investment advisory service, who has traced odd-lot transactions back to 1920.

The characteristic odd-lotter, says Drew, does not buy when the market soars and stories on it begin to land on the front pages. This whets his interest, but he waits to buy until prices slip. Although during a two-or three-day break he may well be scared into selling, if prices take a real drop, he buys heavily.

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The fact that minor dips scare the odd-lotter easily, even when the market is basically sound, makes him a poor short-term trader. For example, during the Fulbright investigation last March when the market broke sharply (TIME, March 21), the number of odd-lot sales rose sharply. But, in general, the small investor is not an in-and-out-of-the-market speculator. Chief reason: it is slightly more expensive to buy or sell odd lots at a given price since an extra broker's commission of one-eighth of a point is charged.

Last Dec. 8 and 15, the New York Stock Exchange ordered its member firms to ask customers why they were buying stocks. Of the odd-lotters, 72.9% were buying for long-term investment v. only 53.5% of the round-lot buyers. Only 7.5% of the odd-lotters planned to hold the stocks less than 30 days, compared to 17.5% of the round-lotters. Apparently because they were buying for investment, the majority of the odd-lotters (70.6%) bought their stock outright rather than on margin, compared to only 43.0% of round-lot purchasers.

More evidence of the fact that the small investor buys for investment is the fact that he is not frightened out of stocks when a bull market turns into a bear. In 1929, odd-lot transactions were 13.2% of all transactions on the New York Stock Exchange. But after the crash, the odd-lot percentage rose to as high as 15.2% in 1931, was about the same in 1932. Since stocks were close to their bottoms in both years, they were good "buying years." And in both years the odd-lotters bought more stocks than they sold. In recent years, the percentage of odd-lot transactions has slipped until it was only 9.1% in 1954.

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Part of this may well be the result of a significant change in the way the small investor buys. Instead of relying solely on his own judgment and buying individual stocks, he is turning more and more to buying shares in investment trusts and through the Stock Exchange's Monthly Investment Plan. As a result, the number of shareholder accounts in investment trusts, which totaled 1,222,218 at the end of 1950, increased to 1,911,493 by the end of 1954. Meanwhile, the number of stock buyers under M.I.P. has grown to 30,000 in a year. Brokers say that most of those who are buying stock, either through investment trusts or M.I.P., plan to hold them for long-term growth and dividends.

There is also evidence of a significant change in the kind of stocks small investors buy. Instead of snapping up low-priced cats and dogs, they are turning more towards the blue chips (the big investment trusts and M.I.P. usually buy only blue chips). Merrill Lynch, Pierce, Fenner & Beane, which sells more stock to small investors than anyone else, has another reason for their new shrewdness about the market. Thanks to a widespread educational campaign by Merrill Lynch and other brokers, small investors have no hesitation about going to a broker for the same information that was once available only to large investors.

Furthermore, brokers now advise a potential small investor not to buy stocks he cannot afford. Thus, the small investor enters the market with a greater degree of financial stability.

In short, all of the evidence seems to be that the small investor fares as well as the big investor in the market. Although there was a time when the small investor was more inclined to buy for the short term, thus taking a bigger risk of misjudging the market and losing money, now he is usually in for the long pull. Since the long-term trend of the market has been steadily up, he has probably made more money than he has lost.

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