Warren Buffett apparently won't blink first, but who will?
Mr. Buffett, the legendary chairman of Berkshire Hathaway Inc., made it clear in his recent annual letter to shareholders that he thinks the U.S. stock market offers few bargains, but he's not going to sell.
In an attempt to forecast who will be the first to dump stock, Pensions & Investments asked some market experts what they thought.
While conclusions were not unanimous, the experts made it clear individual investors should be recognized as a growing, if not the most potent, force in the U.S. stock market.
Because most other investors are committed, or limited, to a fully invested position, individual investors are the most likely to sell stocks on a large scale, some argue.
Pension funds and their managers largely have their hands tied by their asset allocation-based strategies. Institutions may reallocate periodically, but they generally are going to stay fully invested.
Mutual fund managers, previously a group that might go to cash or bonds if they so desired, also have been corralled into keeping fully invested positions. Those that did otherwise in recent years were penalized heavily through underperformance, costing some managers their jobs.
FREER TO TRADE
Individuals are not hampered by such restrictions.
"The elites don't matter anymore," said Donald Coxe, chairman of Harris Investment Management Inc., Chicago.
The stock market used to be controlled by a relatively small group of investors, the financial elite, he said.
But over time, the mandate placed on institutions has forced them to always be fully invested.
Mr. Coxe calls the resulting shift in power to individuals "the third American Revolution," coming behind the revolt that created the United States, and the Industrial Revolution.
"No other industrial society has achieved this," Mr. Coxe said.
Hence, consumer confidence has become more important than other economic data, he said. And perceived weakness in the economy or the president could send individuals to the exits.
Much of the evidence of the individuals' power to affect the market has come following short-term market corrections in recent years.
"The retail investor has been trained to buy on weakness," said Andrew Massie, global director of research for Dresdner RCM Global Investors, San Francisco.
As a result, corrections have been short lived, with retail investors pouring more money into the market when stock prices fall.
GETTING TAPPED OUT
But Mr. Massie said that at some point, individuals will be tapped out; they will be fully invested in stocks.
When a correction occurs under those circumstances, the market will not be rescued by individuals.
"We just don't know when that point will be," he said.
Peter Bennett, chief investment officer-equities for State Street Research & Management Co., Boston, said it will be an extended period of negative returns in stocks that causes individuals to become net sellers.
Mr. Bennett said the bear market of 1973 and 1974, when stocks fell and fell, is the type of situations where real selling will occur.
In that type of bear market, individuals are likely to succumb first, he said. "They've never seen anything like that."
Martin D. Sass, chairman and chief executive of M.D. Sass Investors Services Inc., New York, agrees retail investors have been buyers on weakness, but when a measurable market fall occurs, he thinks retail investors will sell.
"When (the stock market) blows through 10% on the downside, then you'll see the herd instinct take over," he said.
BIG SELLERS IN '87
As evidence, he cites the crash of Oct. 19, 1987, popularly known as Black Monday. Retail investors through mutual funds were big sellers on the Friday before, and created a "tidal wave" of selling on Black Monday, he said.
While institutional investors are not immune from that selling mentality, retail investors will sell out of stocks the quickest in large numbers, he said.
Conversely, J. Thomas Madden, chief investment officer for U.S. equities and high yield at Federated Investors, Pittsburgh, said institutions will reach the exits first, given that individuals have became too accustomed to buying on weakness in the market.
"My belief is that institutional investors will be the early sellers," he said.
He said it will take quarters, and possibly years, of bad stock market returns for individuals to capitulate, which at that point will signal "a bear market bottom."
Institutions, particularly those that are leveraged, will be "far more quick off the mark" in selling out of U.S. stocks, he said.
Availability of derivatives and publicly traded index funds make it much easier for institutions to act quickly, Mr. Madden said.
Broker dealers, who have been making money by leveraging their inventory, will be forced to sell quickly in downturns, he added.
Curtis Lane, managing partner with Disciplined Growth Investors, Minneapolis, agreed institutions are more likely to get out. He said that, despite an increase in the restrictions on mutual fund portfolio managers, it is not unheard of for a multibillion-dollar mutual fund to go mostly to cash.
Others believe that once the selling begins, all types of investors will act.
"I don't think it will be any particular investor selling," said Leif H. Olsen, president of, Leif H. Olsen Investments Inc., New Canaan, Conn.
Once the news gets bad, anybody can sell, he said.