By George H. Tsai
News of the stock market these days attracts a good deal of attention, since it directly affects the livelihood of hundreds of thousands of people. Nasdaq has dropped more than 3,000 points and Dow 1,000 since March 2000, causing jitters among investors around the world. And it seems the situation is getting worse each day.
High-tech and Internet stocks turned out thousands of millionaires and multimillionaires from the mid-1990s to early 2000. Stock wealth almost quintupled during that time. But those wealthy stockholders are now watching helplessly as their stock values evaporate. Many have lost what they had gained before March 2000, and some even have seen a huge chunk of their capital go up in smoke. Bill Gates, the world’s super-rich man and Microsoft founder, has lost (on paper, at least) about $3.8 billion or more, taking quite a bite from his fortune.
The IRA and 401k holders are no exceptions. The bear market certainly deals lots of retirees a heavy blow, since they depend on their income from stock investments. Many 401k holders are losing college funds set aside for their children. (Of course, many holders of IRA or 401k accounts realize that in the stock market, what goes down eventually goes up, so they’re just keeping tight.)
Who is the villain? Economic slowdown? Government officials? High interest rates? I think the last one is the culprit. It’s the root cause of the economic doldrums and massive layoffs by big corporations.
The Federal Reserve increased the rates a half-dozen times in about a year when our economy was expanding vigorously with little sign of inflation. But the Fed assumed that inflation was appearing on the horizon, and it took precautionary steps to prevent it from rising. The last two increases were unnecessary.
The market analysts also should take responsibility to certain degree for the sharp plunge of stock prices. They downgrade and elevate stocks at will. Psychologically, their comments contribute to market confusion and sway investors’ minds, becoming self-fulfilling predictions. Don’t follow blindly what they say. Use your own experience, observation, intuition and judgment in stock purchases, or consult a veteran broker if you are a novice. Wall Street is a very sensitive institution. A rumor or hearsay can spark a sell-off or buying spree and even destroy a reputable company in which you have invested.
Now the Wall Street is looking for a hero to rescue the wounded market before it bleeds to death. Fed Chairman Alan Greenspan is perhaps that person. Ironically, he also is the man who caused today’s market problem. He was so quick in boosting the interest rates and so slow in cutting them when our economy was stagnant or going downward.
Investing in stocks is American way of life. To a great majority of Americans, therefore, there is nothing more painful than the continued slide of the market. Locally, many upper- and middle-class Asian families have lost not only their holdings but also their houses to pay for broker’s loans.
Believe it or not, nearly half of Americans are stockholders. That doesn’t mean every one is engaged in actual trading through brokers or the Internet; in fact, many even are unaware that they have stocks.
If you have an IRA account or 401K account, then you are a stockholder. IRA managers use the money to invest in mutual funds or stocks. Mutual funds managers in turn invest that money in blue-chip stocks or stocks with average or below-average risks. Of course, there are high-risk mutual funds that fluctuate just like stocks.
To a layman, stock seems to be a short path to get rich. Yes, stocks have created thousands of instant millionaires since the mid-1990s. Securities like Qualcomm, American Online, Microsoft, Yahoo, Amazon and CMGI have become household words throughout the world. Some high-tech stocks had tripled and quadrupled in value in a short period of time in late 1999. The temptation was so strong that many people, including this writer, fell into the “margin trap.” You can borrow as much as 100 percent against your stock equity or capital from online brokerage firms like E-trade and Charles Schwab. However, when the total value of your securities falls below the loan level, you will get a margin call — an urgent telegraph asking you to send additional money or they will sell your stocks to get their money back. Few had predicted that some attractive stocks would drop to a fraction of their peak prices
Now, trapped investors have to bite the bullet and hope the bull will come back soon.
