Buy Stocks? No Way!

By Barbara Rudolph

"Wild horses couldn't drag me back into stocks. Rather than gamble in this market, I might as well go to Las Vegas." So says Curtis Beusman, owner of a sports-medicine clinic in Mount Kisco, N.Y., and he is not talking theory. During the past several years, Beusman has dumped $300,000 worth of stock, more than 80% of his holdings. He is far from alone. Eleven months after last year's crash, most individual investors are avoiding stocks as if they were poison. Some Wall Street executives fear that many of these investors may be leaving the market for good, to the detriment of brokerage firms and future bull markets. Says Hardwick Simmons, vice chairman of Shearson Lehman Hutton: "The small investor is an endangered species."

With good reason. Insider-trading scandals, capped by this month's sweeping fraud charges against the investment firm Drexel Burnham Lambert, have convinced small investors that the Wall Street game is best played by the well-connected. Faced with the market's volatility in the past year, intensified by program trading, these investors fear getting caught up in avalanches beyond their control. At the same time, rising interest rates are attracting them to secure, fixed-income investments, typically bank certificates of deposit and Treasury bonds. The small-timers' absence from the stock market is dampening the averages and reducing business for brokerage houses. To win them back, both the markets and the brokerage industry have launched campaigns to reassure investors that Wall Street is solid and equitable.

So far these moves have failed to be persuasive. As of January, individual investors accounted for only 23% of all trades on the New York Stock Exchange, down from 29% last October and 50% in 1970. On some days their participation drops as low as 10%. The rest consists of transactions carried out for institutional investors, including brokerage houses trading for their own accounts and pension funds.

Despite the slump in small-investor trading, individual shareholders still control the majority of stock listed in the U.S. But they have sold off more stocks than they have bought during 16 of the past 17 years, while institutions have been net buyers. Sindlinger & Co., a research firm, estimates that only 3.7% of all U.S. stock-owning households have immediate plans to buy more shares, down from 35% near the peak of last year's bull market.

Such widespread avoidance of Wall Street is producing some painfully quiet days for traders. A year ago, volume on the New York Stock Exchange often exceeded 200 million shares a day. Since the crash, it has typically reached just 160 million shares. Meanwhile, the Dow Jones average has drifted down from a high of 2169.45 three months ago to a low of 1978.66 during August. Last week the stock market was buoyed somewhat by a sharp improvement in U.S. trade: during July the spread between exports and imports narrowed to $9.5 billion, down from a $13.2 billion deficit the previous month. In reaction, the Dow rose 29.34 points, closing the week at 2098.15.

Investors are loath to return to the market because they remember all too clearly how helpless and exploited they felt on Black Monday. Many stockholders could not reach their brokers and felt whipsawed as they heard on radio and television that large institutions were rushing to dump stock. "Individual investors are still licking their wounds from the crash," says Suresh Sundaresan, professor of finance at Columbia University's School of Business. So far this year the three major stock exchanges have arbitrated more than 3,000 complaint cases between brokers and shareholders, a 66% increase over the same period last year.

Many small investors see the stock market as a clip joint dominated by behind-the-scenes players, a suspicion no doubt aggravated earlier this month when the Securities and Exchange Commission accused Drexel Burnham's junk-bond king, Michael Milken, of teaming up with the now imprisoned arbitrager Ivan Boesky to carry out insider trading and an array of other securities violations. Says a New York City-based financial analyst: "Many people think the stock market is one of the sleaziest enterprises in the world, only slightly better than dope dealing."

Even before Black Monday, many investors worried about the market's wild streak. As computer-driven program trading became commonplace among large institutional investors, which use the strategy to make a quick profit by simultaneously trading huge batches of stocks and related contracts on the futures markets, the market lurched and lunged by more than 100 points a day.

Rising interest rates are also keeping investors away from the stock market. When a two-year U.S. Treasury note earns annual interest of 8.6%, stocks appear exceedingly risky to some. "I can get close to 9% without worrying about all those traders in New York," says Charles Janke, a Houston investor. "You can't beat that." Many individuals are turning to a relatively unusual type of Treasury note: zero-coupon bonds. Like savings bonds but issued in denominations of $1,000 to $5,000, these certificates are sold at a deep discount on their face value at maturity, from six months to 40 years off. A record $5.3 billion worth of zero-coupon Treasury bonds were sold in August, about ten times the volume sold during the same month last year.

Many disillusioned shareholders are looking for an investment over which they can have some control. Last year Peter Hoyt and his wife Peggy sold most of their stock in order to finance a magazine-publishing business venture. "Unless it's your full-time vocation to play around in the market, it's a dangerous game," Hoyt says. At the same time, Hoyt put money into a gold fund as a hedge against inflation or hard times. Says he: "It's almost a vote of confidence that things are going to get worse."

Judith Meuli, 50, was an active stock-market investor for ten years, putting money mostly into savings-and-loan and technology issues, until she lost $6,000 in the crash. Says Meuli: "I only want solid things, like real estate." Since 1983, she has bought, rehabilitated and rented four apartment houses, mostly in marginal Los Angeles neighborhoods. She prefers a safe haven for her spare cash as well: "I keep looking at banks that are paying good interest rates." New Yorker Peggy Berk, 37, who owns a media-consulting firm, cashed in stock worth $45,000. She spent about $40,000 moving her office to Fifth Avenue and furnishing it. "At least I'm investing in something I believe in," says Berk. "The stock market has become a crapshoot." Berk's remaining $5,000 will appear on her back: she bought two fur coats.

Still, a hardy minority of small investors profess to be unfazed by the exodus from the stock market. George Ware, 64, administrator of the research group at the Morton Arboretum in Lisle, Ill., has been investing in the stock market for 46 years. "I've been through so many ups and downs that it's not as upsetting as it used to be," Ware says. He keeps a fairly constant 25% of his portfolio in stocks, although he has gradually swapped more speculative shares for blue chips.

But such investors are getting rarer, as any stockbroker can attest. For the first six months of the year, commissions at all brokerage firms fell to $3.5 billion, down from $4.5 billion last year. Pretax profits declined 36%, to $1.6 billion from $2.5 billion. In general, companies that are most dependent on retail business have been the hardest hit, since individual investors pay higher commissions than their institutional counterparts. Paine Webber suffered a 99% drop in its second-quarter profits from the same period last year, and is rumored to be a takeover target. The poor profits are likely to prompt still another round of Wall Street layoffs before the end of the year. Since the crash, as many as 25,000 brokerage-industry workers have lost their jobs.

Partly to lure back the small investor, the stock exchanges have made some - major reforms. Because the simultaneous program trading of stocks in Manhattan and index futures in Chicago has often aggravated market volatility, the New York Stock Exchange and the Chicago Mercantile Exchange have proposed placing restrictions on prices when they start sliding out of control. If the Dow Jones average fell 250 points or more in one session, trading would stop for one hour on the Big Board and in Chicago's Standard & Poors futures pit. The New York Stock Exchange hopes to open an "express lane" to speed up the trades of small investors. Whenever the Dow moves 25 points or more in a single day, individual investors trading 2,000 shares or less would be allowed to execute their buy or sell orders before any large institution began to trade. All such reform proposals will need approval from the Securities and Exchange Commission.

Brokerage firms are resorting to some old-fashioned salesmanship to win back their wayward customers. Steve Hasbrouck, national sales manager for Cleveland-based Prescott, Ball & Turben, tells his brokers to meet with their clients in person rather than make perfunctory phone calls. Says Hasbrouck: "They're much better off sitting down with the client and his family over a cup of coffee." Hasbrouck's brokers, like most in the industry today, inquire more carefully about their customers' financial needs, asking about plans for retirement or children's college education. Brokers need their old clients, and the customers know it. Now that small investors are playing hard to get, they may start receiving the attention they deserve.

CHART: NOT AVAILABLE

CREDIT: TIME Chart By Joe Lertola

From a survey by Sindlinger & Co.

CAPTION: BEAR SCARE

DESCRIPTION: Percentage of individual stockholders with plans to buy additional stock; color illustration of bear climbing over chart as men and women run away.

With reporting by Lisa Kartus/Chicago and Thomas McCarroll/New York