Bull!

by Maggie Mahar

  He had better luck with bonds: “In 1980, I began buying corporate bonds. Pacific Tel, for example, offered a 30-year bond paying around 16 percent. I’d buy them on margin, carry them for nothing, and either sell them or sell part and collect 16 percent on the rest.” Unfortunately, he did not collect 16 percent for long: “As usual, you find life intruding. I wound up selling the bonds in ’83 or ’84—I was starting a satire magazine, and I put the money into that. And of course, lost all of that money. The magazine went under.”

  By the early nineties, Wasserman, always resilient, had launched a new career as a political consultant and writer in Washington, D.C. He was a success. By then he was married, had a family, had bought a house, and was making good money. Things were getting serious. He began putting the maximum that he could into retirement. In the meantime, Wasserman remembered the nest egg he had left sitting in TIAA-CREF. “In 1989, after 15 years, I finally took a look at it,” he recalled. Of the many investment strategies that he had tried, benign neglect turned out to be the winner, hands down: “The $3,000 I put into bonds had grown to $6,000. The $5,000 in stocks had grown to $30,000. And that was it for me. The clouds parted…I had a vision. And after that, I put everything I had into stocks.”

  Fortunately, by now, Wasserman had been weathered by experience. He took a cautious approach and put most of his money in conservative funds such as the Clipper Fund and GMO’s Pelican Fund. Although these were not the most familiar names of the nineties, by the end of the decade their total return would outshine many a marquee fund. At last, Wasserman seemed to have found a system that worked. Just one question remained: Would he stick with these choices, or would he, like so many other investors, be seduced by the siren call of high-flying stocks? Wasserman offered one hint: “I didn’t buy Internet stocks until 2000.”25

  Nevertheless, Gary Wasserman survived the nineties better than most because he had waded into a difficult market while still very young, wagering small sums. Other investors learned how to invest by reading the generally cheerful personal finance magazines that filled newsstands in the early nineties, and then plunked down most of their life savings. But Wasserman had studied in the school of hard knocks. Gradually, he figured out that he was not Warren Buffett. “It’s surprising how long it takes to learn,” he said with some irony, looking back over a 25-year investing career.

  Among the baby boomers who came to the bull market of the nineties, Wasserman would be the exception. Few members of his generation remembered the frustrating market of the seventies: it was not a young man’s market. As for the older investors who suffered through the crash of 1973–74, by the time the next bull market began eight years later, the majority had retired from the field, so badly burned that they would never touch a stock again. As a result, most of the investors who buoyed the bull market of the nineties had never seen a bear. In 2002, fully 56 percent of those who owned stocks or stock funds had purchased their first shares sometime after 1990, while 30 percent of all equity investors had gotten their feet wet only after 1995.26

  The new investor would be the final, crucial member of the cast needed to stage Act II of the Great Bull Market of 1982–99. Without his enthusiasm, his faith—and, above all, his cash—the bull market could never have spiraled so high, nor lasted so long.

  THE NEWCOMERS SWITCH TO STOCKS

  As the nineties began, mutual fund companies scrambled to attract the newcomers. By 1992, they were succeeding. That summer, 1 in 10 mutual fund shareholders had purchased his or her first fund in the past 18 months. Nearly three-quarters of the novices snapped up mutual funds that invested in stocks. The median age of the new mutual fund investor was 37, his or her median household income $50,000. Fully 42 percent were women.

  Many of the investors who came to the market in the nineties were baby boomers, but others, like Sauerwein and Postlewaithe, were older.27 Some financial professionals attempted to caution the novices. In 1993, Neal Litvak, head of Fidelity’s product marketing, personally manned Fidelity’s flooded phone lines for a day and a half each week. Litvak found the vast majority of investors opening new accounts fell into two groups: boomers in their 30s and early 40s, and older bank customers venturing into the markets for the first time. The greenhorns made him nervous. “The truly scary group are the 45-to 65-year-olds who have never touched a stock or a bond before in their lives,” Litvak confessed at the time. “We try to get these people to split their CD money between money markets and short-term government bond funds, but when they look at the menu of funds that we offer, their eyes gravitate to the double digits. They think bonds have a yield just like their CD. They think the Magellan Fund has a fixed rate of return. Many have no idea their principal is at risk.” The kicker, said Litvak: “These folks represent half of the people coming into mutual funds.”28

  Why were so many so willing to venture into unfamiliar waters? The short answer, both for the boomers and for the older investors, was interest rates below 3 percent—unimaginable just a few years earlier.

  Throughout the eighties most Americans chased yield, sinking their savings into whatever bank accounts, CDs, or money market funds paid the highest rate. But during this period, returns on most bonds plunged. From 1989 to 1992, Fed Chairman Alan Greenspan dutifully whittled away at short-term interest rates, and by 1992 CDs and money market funds were paying as little as 4 percent. Municipal bonds had fallen to 6 percent. Thirty-year bonds yielded 8 percent. Such returns seemed measly to investors who clung to fond memories of six-month bank CDs paying 13 percent—and harbored less fond memories of inflation approaching 15 percent. A year later, the federal funds rate stood at 3 percent, the lowest in three decades.29 Little wonder investors felt they had no choice but to begin buying stocks. “I’m bullish partially out of necessity,” explained John McDermott, a 71-year-old retiree from New Jersey. “Now that I’m retired, the only way I have to increase my income is to get into equities.”30

  Less affluent investors, too, turned to stocks. In 1983 individuals with incomes over $250,000 owned 43 percent of all publicly traded equities. By 1992, their share of corporate America had fallen to 23 percent. Meanwhile, Americans with incomes under $75,000 had watched their stake grow from 24 to 42 percent.31 Who was coming to the market from 1990 to 1995? A survey of families who owned equities in 2002 would show that only 12 percent of the wealthiest group polled (families with assets of $500,000 or more) bought their first stocks in the early nineties—more than three-quarters of these households already owned equities. By contrast, one-third of families with assets of $25,000 to $99,000, and one-quarter of those with assets of $100,000 to $499,000, made their first purchase between 1990 and 1995.32 (See table “Who Owns Stocks?” Appendix, pages 463–64.)

  “It’s just what you’re supposed to do with your money. It’s what someone tells you to do—it’s the responsible thing,” said Michael Malone, 59, head writer of ABC’s soap opera One Life to Live. Still, Malone did not entirely trust the market: “I keep thinking of 1929—and those movies of people jumping out of windows with cocktail glasses in their hands.” Malone would have preferred to be living in a world where CDs paid, say, 8 percent. He still remembered, and envied, friends who made 14 percent a year on CDs in the early 1980s. “But I was a novelist then, and didn’t have any money. I didn’t begin writing for television until ’91, and by that time, my only choice was stocks.” Though, frankly, he confided, “I’d rather go to the track where you can see the horses, instead of betting on something that is just initials to me. But I don’t want to be foolish, and these days, if you talk about putting money in a bank, you’re made to feel that’s like putting it in a sock under your bed.”

  Whenever Malone called his broker to say, “Isn’t the market getting pretty high—shouldn’t I be cashing in?” his broker replied, “Where else are the boomers going to put all of that money? It has to go somewhere.”33

  From 1960 to 2000 the boomers’ hopes and dreams would drive every trend from the Beatles to
Botox. To many, it seemed inevitable that the bull, too, would prance to their drummer.

  THE NEED TO “SCORE”

  Falling interest rates were not the only reason that investors were willing to wager their savings on equities in the early nineties. One could argue that it took the recession of 1990–91 to push the majority into the market. As the nineties began, many remained leery of Wall Street. True, 1987 had seen a brief blizzard of buying—but then came the October crash, followed by tales of insider trading in Lower Manhattan. If Black Monday didn’t take the small investor’s money, white-collar criminals like Ivan Boesky took his faith. In the fall of 1988, Barron’s devoted a cover story to the disappearance of the individual investor: “The Case of the Vanishing Investor: Where’d He Go? Why Did He Leave? When Will He Come Back?”34

  What would it take to bring the individual investor back into the market? Wall Street asked. This was when Bob Farrell, Merrill Lynch’s chief investment strategist, offered the theory that hard times might drive investors back into stocks: “If people feel that their standard of living is going down, or if there is a decline in the value of housing, more people will be looking for a way to ‘score,’” Farrell had explained in 1988. “If the little guy views equities as a speculative game, he may be more likely to play it if he feels he has to find a way to accumulate wealth.”35

  As bad luck would have it, the recession of 1990–91 provided the catalyst that Farrell predicted. Baby boomers watched white-collar unemployment climb while job security sank—along with the value of their homes. In some areas of California and the Northeast, housing prices had fallen by as much as one-third from their top a few years earlier.36 Younger boomers who had been closed out of the housing market during the bidding frenzy of the eighties were still trying to buy their first home. But how could they hope to put together a down payment if savings banks were offering only 3 percent interest on their deposits?

  Back to the wall, investors surged into stocks. This is not to say that individual investors suddenly trusted Wall Street. As late as 1993 a Lou Harris poll revealed that only one in three investors believed that a “level playing field” existed between individuals and institutional investors.37 Nevertheless, they “needed to score.” “The funny thing is that anxiety motivates people to take a risk,” Peter Bernstein, author of Against the Gods: The Story of Risk, observed in a 2001 interview. “You’d think that anxiety would make them risk averse—but it doesn’t. They’re more risk averse when they have more to protect.”38

  This is not to suggest that the majority of investors felt forced into the market by either low rates or recession. Few would say, “I had no choice. The Fed made me do it.” Most enjoyed the illusion, at least, of free will and could give an enthusiastic account of how they were inspired to become investors. In 1991, after all, it looked like the bull was staging a comeback. That year, the S&P rose more than 26 percent. To some, the market looked rich, but investors were primed to take the gamble “despite high price-to-earnings ratios,” USA Today reported early in 1992.39

  To many, P/E ratios were meaningless. More to the point, investors saw few alternatives. Guilty boomers knew that they must atone for the shop-until-you-drop eighties, if not by saving more, then by pursuing higher returns. If the seventies was the Me Decade, the eighties had been the Greed Decade. Now, boomers found themselves facing an Age of Anxiety. A 1993 survey of relatively affluent boomers with household incomes of $50,000 revealed that they felt it would take $1 million to make them feel financially secure. Meanwhile, they confessed, they were saving an average of just $6,300 a year.40 No wonder they craved double-digit returns.

  Wall Street fanned their financial anxiety. The Street’s advisors admonished boomers that they must save more—but then published projections that suggested that, without sky-high returns, they could never save enough. Gary Wasserman felt the pressure. “At some point at the end of the eighties, I read one of those insurance company projections showing me what I needed for retirement. I thought ‘there is no way I can do this.’ Of course, the projections turned out to be way off—they assumed much higher inflation. Still, that was one of the reasons that I saved as much as I did—and began keeping all of my retirement money in equities.”

  In 1994, Merrill Lynch turned up the heat, publishing its second annual Baby Boom Retirement report. The results terrified the Pepsi generation: in order to avoid “dramatic declines” in living standards when they enter retirement, baby boomers must triple the amount they save each year, Merrill declared. And that was the best-case scenario. Assuming “even moderate cuts in future Social Security benefits,” the study revealed that baby boom households should be saving “more than five times—rather than three times—what they save currently.” Stiletto italics drove the point home. Under “worst-case projections,” Merrill’s estimates suggested “the baby boomers may be saving less than one-tenth of what is required for a secure retirement.”41

  In the early nineties, Wall Street bombarded the boomers with seemingly authoritative projections. The problem was that the charts and tables made assumptions about inflation, future stock market returns, and future bond market returns that were, at best, guesses—at worst predictions designed to stampede investors into taking more and more risk.

  Without question, Americans needed to save more, but very few could afford to increase their savings tenfold. In fact, the majority lacked the discretionary income needed to triple their savings. Those who did have the money lacked the desire. Ideally, the invention of tax-deferred retirement plans like the 401(k) would have spurred investors to tuck more money away, but it did not have that effect. In the nineties, Americans spent more and saved less. Their only hope, it seemed to many, was to chase ever higher returns.

  In truth, affluent boomers were not that far from their goal. Consider the typical new investor who, according to ICI, was 37 years old in 1992 with financial assets, not including his home or a pension, of $60,000.42 By tucking that $60,000 into risk-free 30-year Treasury bonds in 1992, he or she could have earned 8 percent a year, year after year—without ever losing a night’s sleep—for the next 30 years. (Of course, locking money up for 30 years means taking the risk that inflation will heat up, but historically 8 percent has been a relatively good hedge against inflation. And, over time, if rates moved higher, the boomer would be able to capture the higher rate as he added to his savings.)

  At age 67, the boomer who began with $60,000 would have had over $500,000, plus whatever he or she had added to the retirement account over those 30 years. If, as he earned more, he saved, say, just $7,500 a year instead of $6,300, he could easily have built a nest egg of nearly $1.5 million—while averaging “only” 8 percent. In other words, there was no need for these upper-middle-class boomers to chase double-digit returns.

  Yet “everyone urged small investors to take more risk—nobody talked about saving just a little more,” recalled Peter Bernstein, author of Against the Gods.43 Throughout the nineties, baby boomers would be overwhelmed with financial advice, yet in hindsight, the counsel that the boomers most needed was the simplest: save just a little more, but save consistently. Start early; spread the money out; and avoid large losses by shunning steep risks. Pass by anything that sounds too good to be true, and let the miracle of compounding do the rest. If an investor earned 8 percent over a lifetime of saving, his money would double roughly every nine years.

  Buying a 30-year bond in 1992 would not solve the retirement problems of less affluent families, however. With median household incomes at $30,786, the average family simply did not have assets of $60,000 in 1992—or another $6,000 left over to invest each year after paying for the necessaries of life. But gambling on high-flying stocks would not be the answer to their dilemma either. Down the road, what these middle-class families would need—first and foremost—would be a safety net in the form of a stable Social Security system. In other words, they would need a system that did not risk its funds on the uncertainties of the stock
market. Secondly, if they had 401(k)s, they would need plans that gave them a much better opportunity to manage risk by diversifying their savings.44

  But in the early nineties neither Wall Street nor the mutual fund industry had much incentive to urge investors to discover the peace of mind that might come with owning Treasuries. “Wall Street makes far more money if people buy stocks rather than bonds,” said Bill Gross, chairman of Pimco, a fund company that specializes in bond funds. For one, an investor who is holding a bond to maturity is not trading in and out of the market. To generate fees, Wall Street needs trades. Secondly, “To sell a product profitably, you need glamour and you need sizzle,” added Gross, who, by the late nineties, was generally recognized as the Peter Lynch of bonds. “There is glamour and sizzle in a stock with a potential growth story that bonds simply lack. That is what allows the equity people to charge more. They always earn the higher fees—investors will take the bait.”45

  The media loves sizzle, and in the early nineties, magazines waving the gaudy banner of “Hot Stocks” filled newsstands. Established business magazines like Fortune also began putting more emphasis on personal finance. In 1995, Fortune published a “Special Double Issue Investment Guide: Getting the Most from Your 401(k),” which exhorted readers to “PICK A WINNING ASSET MIX.”46

  “You know those golden rules for putting together a retirement nest egg—‘Take your age, subtract from 100, and put that amount in equities,’ and the like? Phooey,” wrote the story’s author, Richard Teitelbaum. “By that reckoning, just 60% of a 40-year-old’s portfolio would be in stocks now, and by the time he or she retired, that share would be down to 35%, an absurdly low percentage. Far better to keep a bare minimum of 80% of your overall portfolio in equities and maintain that allocation up to and even after retirement. Consider this example from Ibbotson Associates, a Chicago research firm. Say you’re 40, earn $90,000 a year, make a 10% contribution (which your company matches to 50%), and get annual raises of 4%. By age 65, assuming a 12%-a-year market increase, you’d have a nest egg of $2,159,611. That’s comfortably ahead of the $1,825,522 you could likely expect if you followed the so-called golden rule.”