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A look at the seduction of investing in the stock market and its implications on Americans' finances.
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00:00it's the most objective industry in the world if your numbers stink you're out if your numbers
00:16are good you get more money it's the most Darwinian it's beautiful it's brutal
00:30it works all right guys let's roll buy five HMTT at an eighth see what happens it's against puts
00:39we're fine I want to see if you can even buy it Colgate opens up an eighth IBM August 95 calls
00:45I want an offering on a thousand I want an offering on a thousand I want an offering on a thousand
00:48yes double down double down I want I want a thousand Pfizer 70 and a quarter it's x we get
00:55the dividends sold a new faith is sweeping the country gathering strength by the day it's 25
01:01it's 25 okay it's 25 over the years as a financial reporter I've watched money manager Jim Cramer
01:08turn into one of the market's most avid missionaries Colgate Colgate Colgate get me get me get me there
01:14are a thousand stocks out there that could make you rich totally independent of what you do for a
01:20living all right if you had bought Merck in the 1950s just bought 10,000 shares of Merck instead
01:27of buying US savings bonds you would not ever have to work again for six and three-quarter
01:34big cascade I believe that stocks like Bristol Myers had they existed a hundred years ago there
01:40would have been no marks there would have been no communism because what's happened is these stocks
01:45have made many millions of people rich and they're going to do it again sold take a look around we've
01:53all become hooked on the stock market within about 14 months made about 30 percent 40 percent of my
02:01money I'm up 35 percent in three months yeah I mean I did 178 percent last year so I'm doing well I
02:08really enjoy it the 1996 model stock market is the most overwrought overexcited thyroid case if you
02:20will we've ever seen in this country we're now using the stock exchange as a kind of souped up turbocharged
02:31national piggy bank and retirement plan people are in the market today because they're afraid not to
02:41be in the market and this represents a tremendous change in the the psyche of the country funding for
02:56frontline is provided by the corporation for public broadcasting and by annual financial support
03:03from viewers like you this is frontline
03:10okay you want to pay 52 for 4300 general mills that's for WD right I got you baby for most of this
03:38century the stock market belonged to insiders men who spoke in a coded language and worked in the
03:44arena we call Wall Street is a Dow Jones industrial but today the stock market belongs to all of us
03:51it lists all the publicly traded companies in the US during a bull market that's lasted 14 years a time
03:58that's seen the Dow Jones Industrial Average rise more than 5,000 points tens of millions of Americans have
04:05become investors that would be a 50 percent rate of return annually there's never been anything like
04:10it I can make twice as much money in the stock market as working real hard in my regular business
04:16and so I think it's an opportunity and it's cleaner it's less people it's your brain and how much time you
04:23want to put into it there's a feeling like everybody's making all this money on Wall Street how do I get
04:30in on the action I have an office on Wall Street look out the window and I can see people queued up to visit the stock
04:35exchange to kind of go in and the visitors gallery and watch their wealth fructify they want to go in there and watch the
04:41stocks go up it's like they're visiting some French cathedral they're out there taking pictures in front of this
04:45building this Mecca Wall Street is one of the great symbols of the free market but it's always been something most of us feared rather than embraced that's what's changed today's market we believe is there for us
04:59helping to send our kids to college or to provide our retirement nest egg or to make our lives better in a hundred different ways
05:06this is corporate America at its finest where the little guy gets to go in and buy a piece of Walgreens and be co-owners with all the rest of the Walgreens Charles and all those very nice people and and and we are part owners so we're not gambling
05:22good morning everybody this is Gary Goldberg on money matters welcome to the program and we are here today everybody's a part owner because for the first time many of you have decided to invest and they all want to talk about it hello Sharon good morning hi thanks for taking my call you're welcome we currently have most of our savings invested in the stock market we're investing making a profit and selling it so we could pay off our credit card set up retirement
05:29uh and the college for the children
05:36we found Sharon and her family in upstate New York
05:43they are modern American investors
05:45we don't have any retirement
05:47owning our own business
05:49that's why we're in the stock market
05:51we're trying to make some aggressive money
05:53very quickly
05:55we don't have any retirement
05:57owning our own business
05:59that's why we're in the stock market
06:01we're trying to make some aggressive money very quickly
06:11Russ works very hard
06:13Russ works very hard
06:15it's almost demeaning that he works this physically hard
06:17he should be more mental
06:19how much of your savings are in the market right now
06:21how much of your life savings
06:23almost all of it
06:25almost all of it
06:27almost all of it
06:29almost all of it
06:31almost all of it yeah
06:33as the whole industry continues riding high
06:35but there are some clouds on the horizon
06:37the IBM's 95
06:39and I see Nike went up to 108 also
06:42I could sit here all day and watch this
06:45and just watch them go up and up
06:47inflation remains well in hand
06:49stop
06:50guys come on
06:52111 and 7 eighths
06:55down 2 and 5 eighths
06:57it was 125
06:59I guess everything's still falling
07:01Russ started watching CNBC
07:03and I
07:05put it on at the carpet store
07:07I just put it on one day
07:09and I just watched the ticker tape go by
07:11the stocks were going crazy
07:13some of them were starting at 10
07:15and going to 80 dollars a share
07:17something like Microsoft doing you
07:19when I first started watching it
07:21I think it was almost 50 dollars a share
07:23what was that about a year and a half
07:25two years ago
07:27and you sit there and watch that stock
07:29go up to 120 dollars
07:31you get kind of giddy about it
07:33what kind of stock do we have?
07:35Microsoft
07:37yeah what are the call letters?
07:39MSFT
07:41if you look at the stock market
07:43the overall when it started back
07:45100 years ago
07:47the stock market was here
07:48it's 1996
07:49and it's up here
07:51and it's gone up and down
07:53but eventually it has ended on the up
07:55Sharon and Russ
07:57live in a small and modest house
07:59but they have big plans
08:01this is our dream house
08:03look here's the plans inside
08:05this is where we're going to live in the back
08:07it's a nice big great room
08:09it's got an arch window up the stairs
08:11we all picked out our own bedrooms
08:13we look at it
08:14when we're off to work in the morning
08:16and when we come home tired
08:18it's just like an incentive
08:20isn't that beautiful?
08:21isn't that nice?
08:27the investment industry
08:28has aggressively quartered baby boomers
08:30like Russ and Sharon
08:31time has come today
08:33and no part of the industry
08:34has been more aggressive
08:36and more successful
08:37than the mutual funds
08:39which offer people
08:40the alluring prospect
08:41of handing over their money
08:42to an expert
08:43a fund manager
08:45and watching him make dazzling gains
08:4785% of the money
08:49now in mutual funds
08:50has come in since 1990
08:53so far in 1996
08:55we've had more money come in
08:57into stock mutual funds
08:59than in any previous year in history
09:01good morning and welcome
09:02to another mutual fund conference
09:04it's a pleasure to see so many familiar faces
09:07and welcome you back
09:08a little concerned about the beautiful nature of this room
09:11and can't help but wonder what that tells you about where we are on the market cycle
09:15by the spring of 1996
09:18when we attended this mutual fund conference
09:21the fund industry had topped the three trillion dollar mark
09:25that's more than the gross national product of France or Germany
09:29and much of that money has streamed in in just the last three years
09:34as the market has made some of its most spectacular gains
09:37there are seven thousand individual mutual funds
09:41there are four hundred mutual fund families
09:44all with their product wear spread out for you
09:47there are bond funds
09:48there are emerging market funds
09:50there are Canadian resource funds
09:52and if you want to invest in something
09:54and you can't find a fund for it
09:56wait fifteen minutes
09:57and someone will devise a fund to sell to you
10:00we have fifteen no-load mutual funds
10:02the emerging growth fund
10:04capital appreciation fund
10:05we don't invest in companies involved in the manufacture of weapons
10:08or the production of nuclear energy
10:10value fund
10:11growth and income fund
10:12we generally tend to pick stocks that pop up on our buy list
10:16as a result of our computer screens
10:18government fund
10:19money market fund
10:20and reserve fund
10:21I have to ask you
10:22I've never heard this before
10:23I've never heard of anybody with a Nebraska tax-free fund
10:26well it's both federally and state tax-free
10:29and invest in municipal bonds
10:31but you have to live in Nebraska to get this
10:33that's right
10:34is it just our imagination
10:36or do these funds all seem to do nothing but go up?
10:39the small cap fund which is directly correlated to our managed accounts is up 36%
10:45it was up 20.41%
10:48last year it was up about 59%
10:50a thousand percent or something?
10:51I don't know if it's that much
10:53but it's certainly approximate that
10:57and the better these funds do
10:59the more the people who run them seem like superstars
11:02five years from now
11:04I think you'll be able to name
11:05the top 25 mutual fund managers in the country
11:07in the way that you'll be able to say
11:09who runs IBM
11:10and who runs Ford Motor
11:11and who runs Chrysler
11:13there's a tremendous pressure
11:14on the mutual fund managers
11:16to get the top performance
11:18on a quarterly basis
11:19certainly on an annual basis
11:21because if they don't
11:22they'll lose their shareholders
11:23they might even get fired
11:25yet if they do very well
11:26they can become very wealthy
11:28very young
11:29the competition is fierce
11:31and the top mutual fund managers
11:34are like modern day alchemists
11:36creating magical market gains
11:38and right now
11:40no one has the golden touch
11:41more than this man
11:42Garrett Van Wagner
11:44who runs a one-man shop
11:45out of San Francisco
11:46then that's my final offer
11:48dozens of stocks cross Garrett's desk every day
11:51everything from U.S. Robotics
11:53to the Rainforest Cafe
11:55another hard rock cafe version
11:57except this time it's got a jungle motif
11:59you think that has a lot of staying power
12:01the old jungle motif
12:02how many ways can you serve a hamburger
12:05you know
12:06no thank you
12:07next
12:08here's somebody who has a great track record
12:09very smart guy
12:10no thank you
12:11done very well for himself
12:12and his shareholders
12:13coming out of nowhere basically
12:15in the last two or three years
12:16everybody else wants to be a Garrett Van Wagner too
12:18and get along while things are going well
12:21can I get your autograph here
12:23Garrett Van Wagner
12:24hi I'm John Booth
12:25nice to meet you
12:26I'm Kim McAllister
12:27I wanted to meet you
12:28this is why I came to this conference
12:29well that's great
12:30I'm glad I had a chance to meet you
12:31it's hard to consider myself a superstar in anything
12:33but I mean that's the title that has been thrown out by various people
12:38and I guess there's the old line of everybody gets 15 minutes
12:41the thing that's disconcerting is I don't know if I'm on my 14th minute with 59 seconds
12:46or I'm on my first minute
12:47thank you very much
12:48thank you
12:49Van Wagner struck out on his own last January
12:51by the summer he had the number one fund in the country
12:55up 60% in less than six months
12:58the fund started with $100,000
13:01by May he had a billion dollars under management
13:05and the money kept pouring in
13:07at the peak we had some days that were over 40 million in a day
13:10at one point in time in late March and early April
13:14the funds were doubling every day
13:16fund managers at the top of their game become gurus
13:21dispensing their wisdom on eager investors
13:24their every word is listened to with rapt attention
13:27what's going to happen to the market people want to know
13:30what companies are about to explode
13:33what is he looking for in a stock
13:35we're looking for being in small cap growth
13:38companies that we think are the best and the brightest candidates
13:41out there these are going to be the next Microsoft so to speak
13:45hey Rick how are you good to see you
13:48getting an audience with Garrett can be a critical event for hungry young companies
13:52Garrett Van Wagner nice to meet you
13:54oh there it is
13:57our device innovative solutions for cardiac arrhythmias that's what we're about
14:03primarily driven by the biphasic waveform
14:07just tell us a little about why you were up there
14:09why were you visiting Garrett just now
14:11well he is a potential funder of our company
14:15we're in the process of doing the financing basically selling stock
14:19and put it simply we're up there begging for money
14:23this business is about human life it is about quality of life
14:27and it's certain experiences like that that bring that home to us
14:33the corporation
14:34you're the CEO of the company
14:36that's correct
14:37you're the top guy in this company
14:39is this the most important thing you can be doing right now
14:42it absolutely is the most important thing I can do
14:45wonderful thanks again
14:46it's good to see you again
14:47appreciate it
14:48what I find very interesting about the mutual fund managers
14:50is that here are people who are the new masters of the universe
14:54they're managing billions or in certain cases tens of billions of dollars
14:59well Wall Street is really running the country today in many ways
15:03and this is a pressure that the corporate executives feel
15:07and they see it time after time if they don't perform
15:10they're out of there
15:12companies will do cartwheels to please powerful shareholders
15:16and when mutual fund managers want stock prices to go up
15:20they feel they have a right to demand it
15:22don't forget the mutual fund guys keep their job only if they pick the right stocks
15:26you can make companies into the right stocks by demanding certain changes
15:31by demanding changes at Sears, by demanding changes at Xerox, by demanding changes at IBM
15:36changes like last year's announcement that 40,000 workers would be downsized from AT&T
15:42the share price instantly bounced up almost three dollars
15:46the merger of Chase and chemical banks
15:4912,000 jobs lost
15:51but Chase shareholders made over a billion dollars
15:54directly or indirectly
15:56the immense influence of the mutual funds were responsible for these upheavals
16:01and sometimes the employee a company fires is also a shareholder who makes money when the price goes up
16:11consider for instance Mary Jane Range
16:14a vice president at Citibank
16:16she was laid off as part of a restructuring two years ago
16:20it was going to be a place I retired from
16:22it was a company that I had targeted and wanted to belong to for a very long time
16:27Mary Jane, who was divorced and single, has all her savings in the stock market
16:33and her biggest holding is in the corporation that cast her out, Citicorp
16:38how did you feel about holding the stock of this company that had laid you off?
16:42I never made the connection
16:45I never made the connection that
16:48this is stock in a company that just took away my ability to earn
16:56a living
16:58after the downsizing at Citibank
17:00the company's stock, which had hit an all time low, rebounded
17:04the stock, as I recall, went down as low as just slightly below twelve
17:10twelve dollars a share
17:12twelve dollars a share
17:14and now where is it?
17:16eighty nine
17:18eighty nine dollars a share
17:20right
17:22today, she's her own boss
17:26a partner in an executive search firm
17:28matching up candidates
17:30often people who've been downsized
17:32with potential employers
17:33how's your job search going?
17:35in what I do now
17:36I am totally reliant on myself
17:39I don't have a pension
17:41I can't even conceive today
17:43of being in a position where you would have total job security
17:46so what do people have to do?
17:48they have to take care of themselves
17:50no one will take care of you any longer in this country
17:54in terms of long term job security
17:58withering pensions
18:00and where does the market fit in that scheme?
18:04the market is an enabler
18:06it is a way for people to increase their accumulated wealth
18:10and to take care of their future
18:14twenty four and seven eight
18:17it's got to go back up
18:18it's got to
18:19it was already up there
18:20everything has got to go back up
18:22Dorothy Free was also downsized
18:24after many years as an employee at IBM
18:27she too has cast her lot with the market
18:31I have another job now as a secretary
18:33I downgraded my salary
18:35something wicked
18:37this is it
18:38I've only got a couple more years to work
18:40so you put money away in investments
18:43and then if you ever need something when the time comes
18:45you do have some money put away
18:47I think everything is driving
18:49Dorothy is Sharon Gorney's mother
18:51together they have a neighborhood investment club
18:54one of ten thousand across the country
18:57that have been formed in just the last year
18:59Fortune advisor
19:00Fortune 500
19:02here's the America's 100 fastest growing companies
19:05I saw an article in Women's Day magazine
19:07how to start an investment club
19:08and I said to my mom
19:09mom
19:10do you want to start a club with me
19:11let's do this
19:12we could get the Wall Street Journal
19:14and see what the high was
19:16the 52 week high
19:18and the low
19:19why not take a shot at it
19:21why not be with everyone else
19:23that everyone's making so much money
19:26a lot of money
19:27for the first time
19:29average Americans like Sharon and Dorothy
19:32see the stock market as both necessary and safe
19:36I don't think savings banks are the way to go anymore at all
19:38I don't even think you should have a checking account in the bank anymore
19:41I was doing a radio show in Kansas City recently
19:45and this woman had gotten into 20th century ultra
19:48which is probably about the most aggressive mutual fund you can get
19:50and it was up about 50% last year something like that
19:54so she said
19:55even if I don't get 50% it's okay
19:58if I get 25% that's okay
20:00I said well how about if it went down 25%
20:02no no no not down just
20:04I'm not greedy
20:05I don't have to get 50%
20:07well in these people's minds
20:09the idea of it going down 25 or 50% is non-existent
20:12If the stock market does drop
20:15that's okay
20:16it will go back up again
20:18it has to because the economy grows all the time
20:21I'm very careful with my money
20:24I would not ever gamble on anything
20:26I will not gamble
20:28I think people should expect the stock market to deliver
20:33good returns over time
20:36with the understanding from time to time
20:38it will tear your heart out
20:40the stock market is a little bit like a savage beast
20:43it is a nice thing to think you've domesticated
20:46but every once in a while remind you subtly
20:49maybe by taking your hand off
20:50that it is not the pet you think it is
20:53So how did we come to trust such a savage beast?
21:00The tremendous crowds which you see gathered outside the stock exchange
21:07are due to the greatest crash in the history of the New York Stock Exchange
21:12The crash of 29 turned out to be the greatest market disaster of all time
21:17but there was a big difference between then and now
21:21Main Street was really not involved in the stock market in the 1920s
21:26it was considered the sort of thing that racy and rather corrupt city slickers did
21:32it was not considered a place for the whole family as the stock market is considered today
21:38and so when news of the crash came
21:40probably a lot of people in small towns and farms across America felt a sense of grim satisfaction
21:47but nobody knew how bad it was going to get
21:50the crash led to the depression which affected everybody
21:54and the depression created a set of financial habits that would last generations
21:59we became extraordinarily risk averse
22:02we hoarded what we had
22:04we never borrowed
22:06and as for investing
22:08it was a laughable idea
22:10the years went by
22:12the New Deal came and went
22:15World War II began and ended
22:17your children grew up and had their own children
22:20and color television was invented
22:22all before you recovered the money you had lost in the crash of 1929
22:27it took 25 years for the Dow to reach 381
22:31which had been the pre-crash peak
22:34the year was 1954
22:36playing the market
22:38you're not serious
22:39not playing the market
22:41investing
22:42there's a difference
22:44mm-hmm
22:45the market came back in the 50s
22:49more than tripling by the end of the decade
22:52but the old financial habits of the depression were still with us
22:56besides
22:57didn't Americans have lifelong jobs and guaranteed pensions
23:01what did they need the stock market for
23:04it wasn't until their children
23:06today's baby boom generation came of age
23:09that the stock market started to matter
23:11why?
23:12because by then
23:14there was a force at work that seemed to practically demand it
23:17every generation I think has a defining economic event
23:21for the generation before the baby boomers
23:24the defining event was the depression
23:26and that left people very preoccupied with jobs
23:29and it created a generation of people who were very security oriented
23:34when the baby boom generation left school
23:38the first great defining economic event was the great inflation of the 1970s
23:44the erosion of our confidence in the future
23:47is threatening to destroy the social and the political fabric of America
23:54the fear of inflation was everywhere
23:59people believed
24:01and you could go back and read articles that were written at the time
24:04that there was no way the inflation rate was ever going to be brought under control
24:08as inflation surged
24:10people watched their savings erode in the bank
24:13which meant they had to do something different with their money
24:16either spend it or invest it
24:19a new psychology was taking hold in America
24:22it was really at that point that stocks began to lose their stigma
24:27as a very risky investment
24:29and so when the modern bull market began in August of 1982
24:34a generation sat up and took notice
24:37and one man more than any other
24:39became the new pied piper for the millions of baby boomers
24:42who were poised to become investors
24:44he managed a little known mutual fund called Magellan
24:48his name was Peter Lynch
24:50Peter, what did you do that the other fellows didn't do?
24:53Well, I'm not sure what the other people were doing, Lou
24:55but what I've tried to do is
24:57I've worked as hard as I could
24:59I've visited over 200 companies every year
25:01but hard work was just the beginning
25:03Lynch also had an incredible instinct for picking stocks that were about to explode
25:08and what were these great picks of his?
25:11Well, right over here we have Kentucky Fried Chicken, the old colonel
25:13I remember in the early mid-sixties when I started with LA
25:16this is one of the single most exciting stocks
25:18I mean, it was more exciting than Netscape
25:20it was more exciting than Microsoft
25:21it was it
25:22it was better than a microprocessor or anything
25:24and then right next to it we have one of my great companies of all time
25:27Dunkin Donuts
25:28amazing company, made great coffee
25:30and they put it in a china cup
25:32they didn't serve in a crummy paper cup
25:34if somebody invents a new logic chip
25:36I'm not going to know about it
25:37no one's ever going to invent a better donut
25:39One reason Lynch became the stock picker for the middle class
25:42was that he had such middle class tastes
25:45he used to prowl shopping malls
25:47and watch what people were buying
25:49and what stores they were visiting
25:51this is like the New York Stock Exchange right here
25:53you know, looking over here at Athlete's Foot
25:54I mean, here's a chance for the public
25:56if they knew something about Nike
25:58the stock went to over a hundred
25:59here's one of my biggest stocks of my life
26:01Taco Bell
26:02right over here
26:03and here's Cinnabon
26:04I'd like to research that if that went public
26:06Well, we can do a little research right now
26:08One Cinnabon, please?
26:10Peter Lynch is a genial, open, reassuring person
26:16you know, a good dose of Peter Lynch
26:18and you feel empowered
26:19the stock market looks easy
26:21investing looks fun
26:23mutual funds look like a sure thing
26:25If the mutual fund industry had not had a Peter Lynch
26:28someone would have had to gone out and invent Peter Lynch
26:31I mean, I'd rather have this than a logic chip
26:33People can understand what Lynch was all about
26:37Sometimes, the bets Lynch took were breathtaking
26:41Joe, this is my greatest stock ever for the fund
26:44This is the largest position in my fund in Magellan in 1982
26:49Everybody thought I was crazy
26:50Remember Chrysler in 1982?
26:52Me? I'm in the car business
26:54It was on the verge of bankruptcy
26:56The U.S. government had to guarantee its loans
26:59just to keep the company in business
27:01Lynch put $23 million, 5% of his fund
27:05on Chrysler and its new minivan
27:08And what did the Chrysler bet add up to?
27:10and all of his other great stock picks?
27:12Well, if somebody had invested $1,000 in Magellan
27:14on May 31st, 1977
27:17the day I left that $1,000 would have been $28,000
27:20May 31st, 13 years later, 1990
27:24That's a pretty incredible
27:26I can see why that would attract a lot of attention
27:29Yeah, I was happy
27:30What that means is that the Magellan fund was up nearly 3,000%
27:35in the 13 years Lynch ran it
27:38But all of Wall Street was booming in the 80s
27:41Corporations were merging and acquiring and taking each other over
27:45Stock prices were skyrocketing
27:47The Dow more than tripled between 1982 and 1987
27:52It seemed as though the bull market would go on forever
27:56And then...
27:57They're calling it the Mundy Massacre
27:59The worst drop in Wall Street history
28:02By the closing bell, the Dow Jones Industrial Average
28:05was in the steepest fall in its 103-year history
28:09It was October 19, 1987
28:13That's me with the beard outside a Fidelity office in Boston
28:17Watching the Dow self-destruct
28:19Like millions of other Americans, I thought this was the end
28:23I remember going out at lunchtime to the local Fidelity office
28:26And seeing a huge crowd gathered around, watching the ticker tape
28:30In shock that the market could fall 100 points
28:33And then 200, and then 300
28:36And there was no breaks on this thing
28:38Well, I was very well prepared for the crash of 1987
28:41My wife and I took our first vacation in 8 years
28:43And we left on Thursday in October
28:46And the day, I think that day the market went down 55 points
28:49And we went to Ireland
28:51First trip we'd ever been there
28:52And then on Friday, because of the time difference
28:55We'd almost completed the day
28:56And I called and the market was down 115
28:58I said to Carolyn, if the market goes down on Monday
29:01We better go home
29:02It went down 508 on Monday, so I went home
29:04So in two business days, I'd lost a third of my fund
29:07But in the end, the 1987 crash turned out to be, oddly enough, rather reassuring
29:14Here we had, for a single day, probably the biggest drop we've ever had in market history
29:20And nothing happened
29:22And in time, and really not so long, the stock market got back to where it was
29:31And that led to the feeling that in the long run, being in the stock market is great
29:37That weak markets are buying opportunities, not times to sell
29:42This wonderful event in 1987 is what people today are carrying around in their heads
29:49Don't worry if the market goes down, nothing bad can happen
29:53After the crash, American investors embraced the market, and especially the mutual fund industry, with renewed fervor
30:01Today, one in 50 American households has money in the Magellan Fund
30:06And the customers of Fidelity Investments alone constitute some 4% of the country
30:12There's a huge amount of money that flows through here
30:14I mean, we're talking about billions and billions of your and my money
30:19Absolutely, absolutely
30:20We do, you know, it's public information
30:22We do between 5 and 7% of the trading on the New York Stock Exchange
30:26Comes out of this room
30:28This room, right over on here
30:29These people
30:30You got it, these people
30:31Even after he retired from Magellan, Lynch remained a fanatical popularizer of the stock market
30:38But he had one important caveat
30:41You needed patience
30:42My best stocks have been the third year I bought them
30:45Not the third week, not the third month
30:47The third, fourth year
30:48People want something to happen in a week, in two weeks, it doesn't work that way
30:52You got it all, KNBR 68 San Francisco
30:56It's only been six years since Lynch left Magellan
30:59But today's fund industry has a whole different mindset
31:03Got it?
31:04Yeah?
31:05MDI, we're gonna try to cross 75G's 7A's this figure
31:08Okay
31:09Do you need to be involved either way?
31:10No thank you
31:11Asking? No?
31:12No thank you
31:13No interest?
31:14No interest
31:15Yes, no thank you
31:16Next
31:17Hey, if you hear of any pieces of cardiac pathways down in the hole this afternoon, give me a call please
31:22AAS, you sold a whopping 800 shares of 32 and 5A's
31:26That's what I like
31:27Beautiful
31:28See you later
31:29Thank you
31:30Bye
31:31God bless this country
31:33Garrett Van Wagner is still the new kid on the block
31:36Yes
31:37But the comparisons have already begun
31:38Yes I do
31:39How do you feel when you get compared to Peter Lynch?
31:41A little embarrassed
31:42A little embarrassed, a little bit surprised, and flattered, I guess would be the things that come to mind
31:49You know, he's a legend in this business
31:51Does he want to come out of the position or is it just trimming?
31:54It's going to be a long time before I'm willing to sort of accept that kind of status
31:57I'd like to do it for 10 or 15 years first
32:00But Garrett won't be given that kind of time
32:03In the overheated market of the 90's, fund managers are scrutinized not just year to year, but week to week and even day to day
32:11This is not a charitable business, charitable institution
32:14By the summer of 1996, Garrett's fund had long since hit its peak of 60% and was stumbling badly
32:22Yeah, 45, under 45 give me a holler
32:24Thousands of people who came in at the top were losing money with Garrett
32:28Right, I want it flat on its butt
32:30How much did you lose yesterday?
32:32Uh, I lost about 18 million in the big fund
32:35No, too high
32:37And that was the worst day you've had since you opened for business?
32:39Worst day I've had since I've been open for business
32:41You've got a tremendous amount of money in that fund that came into the fund after it was up 40 or 50% or 60%
32:50With the expectation that that's what the future is going to look like
32:54My guess is as he got close to being up 60% he probably raised 80% of the money he has under management
33:00So it's quite likely that the overwhelming majority of his investors, their first taste of his performance was a sharp setback
33:11Under this kind of short term pressure, Garrett doesn't have time to buy and hold the way Lynch did
33:17His strategy is all about moving in and out of stocks quickly, sometimes in a single day
33:23Always he's taking the pulse of the market, trying to stay one step ahead of it
33:28It's high stakes poker
33:30I've got one more for you today, I've got 25,000 RXT to buy
33:34With a six top please
33:36What's particularly dangerous about the present mutual fund boom
33:41Is what is called investing is really speculating
33:45The techniques are more about trading, rapid turnover, paying any price for a stock as long as it goes up or behaves a certain way
33:55It is about crowd behavior and stock price behavior, not about analyzing the underlying businesses
34:03God bless this country
34:05Let's feed the old ducks while they're quacking
34:08The companies Garrett is investing in aren't Dunkin' Donuts and Kentucky Fried Chicken
34:13They are mainly technology and healthcare stocks that most of us have never heard of
34:18HNC software has gone from up one to up seven and a half in about a minute and a half
34:23New companies with little or no track record
34:25Marking them up
34:27The way the fund industry has changed has been to liberate fund managers
34:32To pursue hot performance anywhere they can find it
34:36And the result of that is when you buy that fund
34:39You have no idea what that fund manager is going to do with your money
34:43He's free to put it in almost anything
34:46That's what I like
34:47Garrett's stock picks are among the most vulnerable and volatile around
34:51But at the end of the day they can produce eye-popping results
34:55Oh my god look at integrated systems today up eight and three quarters
34:58What did they discover gold?
35:02Do you make money today?
35:05Yeah, we made good money today actually
35:07And we had some real high flyers today so we had a good day today
35:10Do you have a guess how much?
35:12I'm going to say we probably made about 13, 14 million
35:16It's going to be a guess today
35:18Actually he guessed wrong
35:20It was more like 22 million
35:22Not bad
35:23Not bad
35:24The problem is that all the mutual fund managers I think are trapped
35:29In this rather deadly vicious circle
35:31That the more successful they are
35:33The more money flows into their mutual fund
35:36The more money that flows into their mutual fund
35:39The more difficult it is for them to beat the market averages
35:43Or even to match their own past performance
35:47And I think that we may see future situations like that of Jeff Finnick at the Fidelity Magellan Fund
35:54Where mutual fund managers will try to do very strange and unconventional things
36:00Because it becomes increasingly difficult to outsmart the averages
36:05Jeff Finnick was a young whiz kid at Fidelity when he inherited the Magellan Fund in 1992
36:11Within three years Magellan had ballooned to over 53 billion dollars
36:17Making it by far the biggest fund in the country
36:20In early 1996
36:22Vinick made a dramatic move shifting Magellan heavily into bonds and out of stocks
36:29He was betting in effect that the bull market was about to end
36:33But he bet wrong
36:34Jeffrey Vinick made a bad guess and bought bonds and missed out on a truly wonderful levitation in the stock market
36:44And had the epaulets of a celebrity stripped from his shoulders and left Magellan Fund
36:49The man who runs the world's largest mutual fund has resigned, Jeff Finnick
36:54Jeff Finnick's departure should send up cautionary flags for the mutual fund investor
37:00Magellan's returns this year have been well below most other comparable funds
37:04His departure means that people are really not willing to take short-term underperformance
37:11And the expectation of future return
37:15I think that's the really scary thing
37:17That he really only underperformed for a couple of quarters
37:20The public's impatience for big gains is so great
37:24That many people have taken investing into their own hands
37:28The internet is crowded with hot stock tips, financial chat rooms, and lots and lots of so-called advice
37:36One of the most popular sites on the net is an online investing forum called The Motley Fool
37:42Its founders, two brothers named Dave and Tom Gardner
37:47Claimed that if their subscribers invest their money the Motley Fool way
37:51They can count on 20% growth in their portfolios per year
37:55Guaranteed
37:57We've identified a couple of mechanical investment approaches which can be used by anybody
38:01Take only about 30 minutes a year and for more than 25 years have returned to that 20%
38:07And we don't see any big change in the next 25 years
38:10So when we teach that approach we're teaching people financial self-reliance
38:16The Motley Fool is based in a townhouse in Alexandria, Virginia
38:21And staffed by 20-somethings who like the Gardner brothers are true believers in the market
38:26They lead their 250,000 subscribers in a vigorous hunt for the next big winner
38:33Microsoft, ten years ago, had you bought it, not traded it with your broker recommending that you trade it
38:39Not in a mutual fund where it would have been diluted by 60 other stocks
38:43Had you bought it, it's grown at 60% a year
38:45So $10,000 is worth a million dollars ten years later
38:49The problem is, how do you know which of the thousands of hot stocks out there
38:54Are going to turn out to be the next Microsoft
38:57That's the hard part
38:59And it's something Motley Fool subscribers found out the hard way
39:03The company was called iOmega
39:06In early 1995 it came out with a jazzy new computer device called the ZipDrive
39:12Motley Fool subscribers fell in love with the product
39:16And started an online bulletin board devoted exclusively to iOmega
39:20In this electronic hothouse, the stock caught fire
39:24And so we bought the stock at two and a half, added it to our online portfolio
39:29And over the course of the next year and a half it ran up as high as 55
39:33When the stock was at 55, our $5,000 investment, think about it, was worth over $100,000
39:42As the stock attracted more and more attention, the Motley Fool chat board became a frenzied, giddy place
39:50The more iOmega went up, the more of their livelihoods people poured into the stock
39:56By 1996, the iOmega phenomenon had spread well beyond the internet
40:14Last summer, at a Charles Schwab office in San Francisco, people were talking about little else
40:21IOmega was the talk of the town, so to speak, on the stock market
40:26And I would read about it, and I would see that it would rise incredible, incredible amounts in a day
40:32I bought it at 24, and it went up to 80, and it split
40:37And after it split, it went back to 54
40:40And the next morning, I woke up and called up the broker, and it was at 55
40:45And I was like, you know, this is kind of silly, but it's great, you know
40:50IOmega's 19 going in, look at that
40:53But what had the company done to deserve this kind of run-up?
40:56Not much
40:58It was a three-product company, with profits of only $14 million
41:03But at the peak of the frenzy, iOmega's stock was worth over $5.5 billion
41:09Stock prices going up caused people who would not have dreamt of buying them when they were down
41:14To go out and buy them, because after all, they will continue to go up
41:18And the manifestation of this psychology in the marketplace
41:21Has been an extraordinary array of overpriced specimens
41:27You know, companies that changed hands at 600 times the sum of money they can expect to earn this year
41:34Literally things that are seen once, twice or three times in an entire investment lifetime
41:40Have come to pass in 1996
41:42It has been a living museum of speculation
41:46In iOmega's case, it was a bubble that was destined to burst
41:51And eventually, it did
41:53And i watched it go from 55 to 54 to 53 to 52 to 51
41:59All the way down to like 48
42:02And i go, i gotta, you know, i gotta get, i sold at that point
42:06And i put in a stop and sold it at 40, 43
42:10So in the yearly high is 55 and an eighth and it's down now to 23
42:14Right, iOmega's been dropping like a rock for a good week or two weeks
42:19And the Motley Fool boards were full of howls of pain
42:34Show us iOmega here
42:35Okay
42:36You know, this has been a very severe correction for iOmega
42:39The real hype, Motley Fool hype was, you know, right around here
42:44It was a good horse, but it was just a horse and you had to get off it
42:48And there are other horses out there
42:51Try to pick a horse that's not a sprinter
42:54Try to pick one that's gonna be around
42:56The stock got ahead of itself as often will happen with great growth companies, we think
43:02And so somebody could have bought the stock at 55
43:05And seen his investment melt down to about 21 today
43:09Now at the same time, many other people bought it 2 and 5 and 10 and 15 and 20
43:15And may have sold at 48 for all we know
43:18In Japan they had a name for this
43:21They called them the Shinjinri
43:24And it literally meant new human being
43:26They were the 20 something year old people who had had no experience in that market
43:30Were put in charge of all the investing
43:32And they thought that nothing would ever go wrong
43:35The Japanese stock market
43:37Which had been the wonder of the 80's
43:39Crashed in 1989
43:41And it's never recovered
43:43Even today
43:45The Japanese market is just over half what it once was
43:48And once euphoric Japanese investors now feel burned
43:52I find it somewhat ironic that here we are
43:56Seven years after that bubble burst
43:59The Japanese are still trying to pick up the pieces
44:03At that moment in time
44:05We are doing many of the very same things
44:08People are buying stocks for one reason
44:10They are going up
44:12I have two kids I want to put through college
44:15And I figure this is the best way I'm going to be able to double my money
44:18Necessity is the mother of invention
44:21So I've heard
44:22And I have a wife and four kids
44:26I'm a policeman in the city here
44:28And I figured I needed to make some more money
44:32Why not just put it in the bank?
44:34Well the bank only pays you 3%
44:36And it makes you feel like you're not gaining ground
44:41And the stock market is faster
44:44People have confused need with certainty
44:49We need this to work
44:51It seems like it will therefore it will
44:53That's a little bit like going to the track
44:55And betting on number 3
44:57And saying I really need this work
44:59So please
45:03Let's give this up
45:04Just give this up
45:06For the first time
45:07Because it's always
45:09The first time
45:11That's all
45:12You you're hired
45:13You're hired
45:14I mentioned
45:15You're hired
45:17You're hired
45:18You're hired
45:19Maybe
45:20And you're hired
45:21You're hired
45:22You're hired
45:24Well
45:25You're hired
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