Shrink Rap: Healing the Wounded Investor

Do you want to call the rally that's in progress "holiday fervor" following a devastatingly literal fall? Or do you prefer to view it as the market's "wisdom" being followed by those who listen when it speaks?

Call it whatever you want. But psychologically, these descriptions aren't the crux of the issue, at least for the retail investor who hasn't given up and who still has capital left to invest. And it certainly isn't the main concern for the investor who has already given up, whom I'm calling the "wounded" investor.

For a significant number of these investors, this market isn't even an afterthought, let alone an avid interest or preoccupation. In fact, it's worse. Those in the most pain actively avoid having any thoughts at all of the market. Any recollection of the severe losses sustained over the past 18 months is like remembering the death of a loved one. In this case, the loved one was these investors' savings and the hopes and dreams that that money promised to fulfill.

You think all the investors out there are worried about missing the biggest tech move in two years? Think again -- it's only the ones who weren't bitten so badly, who are simply missing in action, who are worried about being caught on the sidelines. The wounded, on the other hand, are scared and ashamed, still feeling foolish for having lost so much money over the past two years. What wasn't lost during the bursting of the bubble was lost in trying to "play the recovery" and prematurely jumping back into the fire, only to get burned again with each false (but enticing) rally from March 2000 to just recently.

Depending on how long this recovery rally lasts, these wounded investors may very well look back and shake their heads in amazement, as if they were watching the Lone Ranger riding off into the sunset, and saying to themselves, "Who was that masked man?" In other words, "How could that rally come and go before I was even ready to give up my fear and come back in?" Maybe some will come in at the top and get clobbered once again. But too many will still be sniffing the market's freshly laid hoof tracks, trying to understand how they lost the scent.

So what do we need to see to motivate the retail investor to come back into this market? What will do the psychological trick to change his or her mind, regardless of the technicals and fundamentals -- or perhaps even in spite of them? Here is a holiday "wish list" that, if actualized, would encourage confidence to the point of a strong return:

The market continues its upward minitrend through the end of the year, led by fund managers' fears of underperformance, and an absence of sharp selloffs, thus decreasing the odds of just another bear market rally, (i.e., we get a sustained rally that truly signals a trend reversal). The retail investor wants to participate when it's safe, and if the trend change is for real, there will be plenty of chances for them to join the party. Unlike many savvy traders who fret over missing the early stages of a bull party, wounded investors don't mind showing up after it's been swinging for while, saving them from that awkward time when they have to stand around wondering if the party will flop.

Leading economic indicators show a rebound, lessening of recession fears and of job insecurity, decent holiday sales, a personal sense of financial improvement through continued incentives and tax cuts, a modicum of good news regarding projections for corporate earnings for the next two quarters, including upside surprises, and guidance of analysts' estimates higher for selected tech bellwethers. All these factors, too, will convince investors that the recovery is for real.

A heightened sense of personal safety and security from "event risk." As indicated by no terrorist attacks in this country for at least the next two months; no further reports of anthrax or any other biochemical threat for the same period; no mysterious plane crashes or major catastrophes anywhere in this country, and no further suspicions or reports of airport security problems.

Further progress in the fight against terrorist activity: for example, "taking out" Osama Bin Laden, Saddam Hussein, Moammar Khadafy, a lessening of tensions in the Middle East; no major international incidents that further remind the investor of the vulnerability of the market to major geopolitical events.

All of the above are aimed at allowing enough time to pass to close their wounds and further the healing process. It can't happen if the wounds keep being opened up by new incidents or bad news. Don't ask me how long all this might take. And don't tell me it's too much to ask and that it assures investors will never make it to the party. Because psychologically, with all their losses, wounded investors feel like it's their party and they'll cry if they want to.