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A Crisis of Confidence?

Oliver Quilla for CNBC.com

All of the gut-wrenching volatility in the market recently has made it easy to forget that stocks are still up 70% since the lows of March 2009. I think it’s fair to say that the market really has climbed the proverbial “wall of worry.” The more important point is that the upswing has occurred largely without the participation of individual investors.

There are a variety of reasons why this is the case.

One, of course, is that the wounds of 2008 and the first part of 2009 have not yet healed. The money lost was so severe in many cases that people can’t stomach the thought of losing even more, so they opt for bonds and cash over the “riskiness” of stocks.

In normal conditions, the ongoing run in stocks combined with anemic interest rates would likely entice investors back into the market. Unfortunately, as was graphically illustrated by the “flash crash” — the Dow’s 400-point drop and recovery in just minutes on May 6 — market conditions have been anything but normal.

This is arguably the most serious question of all: Do individual investors lack faith in the market? At the heart of investing is the idea that the stocks we buy will rise or fall based on how the company performs, or the sector, or the economy as a whole. If investors do not believe this to be the case — or, more pointedly, if they believe the game is rigged against them — they will stay away.

Who can blame them? A $40 stock like Accenture is worth a penny in just seconds? That is outrageous, as is the fact that system-wide guardrails were not in place to prevent such a scenario.

We’re fortunate that the markets were back to pre-crash levels within a week, and maybe this will end up being a lesson learned quickly so that a bigger and more protracted crisis is avoided next time. The SEC and various exchanges have reportedly agreed to strengthen the circuit breakers on stocks, which should help restore at least some faith in the market’s integrity. (We’ll continue to follow this on CNBC and in Investor Brief.)

The Biggest Shame of All

Still, the crisis of confidence goes deeper than computer trading run amuck. It has been a key issue since the mortgage meltdown and financial crisis of 2008. Now, almost two years later, allegations of misconduct on the part of financial institutions are even more in the headlines.

I don’t know which if any of these firms will be found guilty of criminal or civil charges, or which ones will be exonerated. But no matter the eventual outcome, the rash of investigations fuels the perception — real or imagined — that Wall Street is run by selfish money-grubbers who do not act in the best interests of their clients. The often complicated nature of investments, such as derivatives, doesn’t help, either. People are naturally suspicious of things they don’t understand.

I have spent the last 20 years of my life covering Wall Street, and I know there are plenty of good and decent investment advisors who do put their clients first. I also know that, as with any industry, there are less-than-honorable players just out to make a buck.

The real shame is that a few bad apples can spoil the whole bunch. And if this causes people to shy away from equities, the historically best way to grow wealth, then there is a real effect on Main Street as well as Wall Street.

I still believe the American stock markets are worth investing in, but the onus is on us to be vigilant stewards of our money. There are no guarantees, of course, but I believe your chances of success are much greater as an involved investor in stocks rather than stuffing cash under the mattress, no matter how tempting that might be with everything we are hearing these days.

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