Retail Investors Will Rage Against the Dying of Go-Go Growth

A true shift to a value-led market wouldn't just shake up moribund stocks -- it would rock America's new investing culture.
Publish date:

When Internet stocks were tanking a week ago Monday, a lot of people ascribed the selloff to an article appearing in the oddest of places.

The New Yorker

-- a magazine where one expects to see things like

John McPhee

musing on the late Cretaceous, super-realist renderings of Hamptons weekends gone bad, and ads for Costa Rican vacations guaranteed to have minimal environmental impact and a Valdez-sized impact on the wallet -- ran a profile of

Mary Meeker

, the highly regarded

Morgan Stanley Dean Witter

Internet analyst. In it, Meeker (after making the obligatory reference to 17th-century Holland's tulip-bulb mania) says, "I think we will have a big correction in Internet stocks sometime this year. I think a big correction would be very healthy. I personally would welcome it."

When someone like Meeker says things like that, it doesn't do Internet stocks a lick of good. But once you consider what else was going on in the market, saying the article was one of the primary reasons for the fall-off that day is a little preposterous.

About a week earlier it became apparent that the cyclicals -- companies like steel and papermakers whose fortunes rise and fall with the world economy -- were doing much better than people had thought. Investors began pulling money out of the growth stocks they'd fled to when global times looked tough and putting it into stocks that had suffered -- in other words, just about everything else.

Now while there's a lot of noise about how Internet stocks are a mania, or a retail-investing phenomenon or a bubble waiting to pop, it's important to remember that the .coms are, above all,


stocks (they may be all those other things, too). Sure, most of them don't have earnings, or even revenue in many cases, worth talking about. But these companies are growing, or at least are expected to grow, faster than anything. On a day when money was coming hard out of the traditional growth areas (drugs, tech), it makes sense that it was coming hardest out of the Internet. What Meeker said in

The New Yorker

may have fanned the flames, but to say her words started the fire is stretching it.

What's really interesting about the Meeker article is that it appeared in

The New Yorker

, a magazine one doesn't usually associate with what's happening on Wall Street. Until this year, that is. This year, if you read

The New Yorker

, you found out that

Goldman Sachs

was going to run out its IPO in May -- not in late summer like everybody thought -- and you learned that

General Electric's

(GE) - Get Report




(SNE) - Get Report

were in talks to form a worldwide alliance. You saw a good article on what's going on with golf companies and golf stocks, another on the trouble

Marks and Spencer

has had with branding at

Brooks Brothers

, and a couple of excerpts from the new

J.P. Morgan


It's strange seeing these kinds of stories, but when you remember that

The New Yorker

is about culture, it begins to make sense: During the late 1990s, individual investors -- investing heavily in growth even when the experts advised prudence -- have kicked the stuffing out of the pros, earning the respect of America in the process.

'Momentum is fine,' says Morgan Stanley Dean Witter's Byron Wien. 'It had a long run. But even "My Fair Lady" closed eventually.'

That day when the rotation into cyclicals got ugly and growth stocks came crashing down was a tough one for a lot of individual investors. "I had to hold a lot of hands," says one New York retail broker. Growth stocks came back later in the week, but one wonders what would happen if, as some people are saying will happen, the rotation reasserts itself. After being weaned on stocks like





(DELL) - Get Report

, would America's retail investing culture be able to make the switch?

"That culture doesn't care about fundamentals," says Byron Wien, chief U.S. investment strategist at

Morgan Stanley Dean Witter

. "It's about momentum." Wien thinks there will be some sort of adjustment in the market -- after a correction that "cracks" the old leaders. That should give way to a change in the way the market is best played. "Momentum is fine," he says. "It had a long run. But even

My Fair Lady

closed eventually."

It's hard to imagine a world where retail investors have shifted smoothly to value from growth, where chat boards light up on the latest


(AA) - Get Report

rumor. "The people who are day trading," says one Southeastern retail broker, "they're not playing


(CAT) - Get Report

. They know nothing about

International Paper

(IP) - Get Report





Moreover, those stocks just don't show the kind of movement that people have come to expect out of things like the Internet. The broker thinks people who are only playing with a bit of their money (leaving the bulk of it in mutual funds) will come out ahead, while those who have given up their regular jobs to be day traders could be in for a reckoning.

Santa Clara University

finance professor Meir Statman, who does a lot of work on cognitive finance, also thinks the transition from one kind of market to another could be hard. "It's going to shock them for a while," he says. "One of the things that is likely to happen is it will trade a bit less. But if the market as a whole is up, their portfolios will probably be slightly up and they'll still feel like they're masters of the universe.

"All people have short-term memories," adds Statman. "In a year, they will be telling you they knew all along the shift would come. And they will tell you they were ahead of it."