WASHINGTON - When James Zweig bought his first stock back in the late 1970s, the 16-year old waited each day for the paper to arrive so he could gauge his investment's performance.
"It was very exciting to wait until the next day, to get those five updates a week," said Zweig, now a senior writer at Money magazine. But the proliferation of financial press, the Internet and a 24-hour television news cycle have changed that. "Now, I can get five updates a minute," he said.
The explosion of financial data available to individual investors in recent decades, has affected the way they approach the market, and the decisions they make. The problem is, the information they're getting might not be the information they most need, said panelists during a presentation at the Investment Company Institute's General Membership Meeting held here earlier this month.
"The vast majority goes into the market without guidance," said Don Phillips, managing director at Chicago fund-tracker Morningstar.
And, in large part, information overload is to blame, both from the media and the investment companies themselves.
"The prospectus is not a good tool for the do-it-yourself investor," Phillips said.
That's because prospectuses, documents densely packed with legalese, aren't designed for investors, but for regulators, said James Glassman, a resident fellow at the American Enterprise Institute, a conservative think-tank based in Washington. Glassman advocates easing up on regulations and allowing free market forces to preside.
The role of the media is to cut through the spin and separate the marketing materials from pure performance, Zweig said. But too often, those who turn to the media for clarity only get more confused. "It's not TMI," he said, using short-hand slang for too-much-information. "It's any information is too much information if people don't know how to feel about it."
Both investors and media outlets learned that lesson the hard way when the tech bubble burst in 2000. "Many competent writers in the 90s had never seen a bear market," he said. "They were skeptical in their outlook, but not enough," said Wall Street Journal Reporter Tom Lauricella.
"The financial press got sucked into the bubble as much as people in the market themselves," Lauricella said. The fastest-ever rising market coincided with a fast-growing media and a fresh crop of reporters as green as the new batch of fund managers they were covering.
Investors reacted to the media frenzy with a frenzy of trades, in part because they literally could not control themselves, said Zweig, who has studied the neuroscience of investment decisions. "The brain reacts to any repeating stimulus," he said.
That kind of reaction certainly was evident in the late 1990s, when in spans of less than a week, the market turnover was as high as 700%. Traders made a killing from commissions, the press marveled at the volume, and investors watched their investments on a seemingly unstoppable climb.
But the ascent did stop, and both investors and the press were burned.
That burst, followed by the bear market of 2000 to 2002 and the mutual fund scandal of 2003, helped both the investment community and the financial media mature, Lauricella said.
Rather than pull out of the market altogether, however, investors modified their behavior.
"Investors are asking tougher questions," Phillips said. They are also scrutinizing expense ratios and paying close attention to performance before buying mutual fund shares, panelists added. And while companies that were implicated in the scandals, such as Boston-based Putnam Investments and tech-heavy Janus of Denver, suffered severe outflows, investors continued pouring money into companies that could win their trust, panelists said, sustaining mutual funds as the largest financial services product on the market, with $8 trillion in assets.
The challenge for companies has been to cater to investors who are now more conservative, rather than impressed with short-term gains.
"If mutual funds were overvalued in years past, they are underappreciated now," said Morningstar's Phillips. "Investors go where they see long-term performance, where they see better value proposition and where they see good results."
One result of investors' change in attitude has been a counter-trend toward more hands-off products, such as so-called lifecycle, or target date funds. "Investors are turning to these because they are saying I don't want to do this. I can't do this,'" Lauricella said.
Glassman cited the industry's ability to devise such products, as well as exchange-traded funds and other types of streamlined products, as a testament to its resilience and key to survival. "That's the theme of American business," Glassman said.
Zweig warned that although new products meet with regulators' approval, they might not be good investments, using the example of the myriad of emerging markets mutual funds and ETFs introduced in recent months, on the heels of the buzz surrounding recent past performance in places like Brazil, Mexico and China.
"Investors you bring in now have a very good chance of being burned," Lauricella agreed.
Yet these new products pop up because many fund companies are most interested in attracting assets, not delivering returns to their investors, Zweig argued.
Likewise, many companies allow funds to swell to an unwieldy size, rather than to close them to new investors, he added.
"If you wouldn't want your mom in it, you should close it," Zweig said.
Instead, fund companies use marketing to lure more investors through images of aging couples walking on the beach with their loyal pet dog, he said. "The fund companies use marketing to manipulate the behavior of investors," Zweig said. "To me, that's the real scandal."
In fact, mutual funds would not have regained investors' confidence as quickly had the mutual fund scandal broken in the middle of a bear market, rather than at the tail of one, Zweig argued. He warned against investors becoming too trusting too quickly.
Zweig would push the industry to adopt a performance standard measured by time-weighted, rather than dollar-weighted returns, so that portfolio managers are evaluated on consistency, rather than a few big, short-term gains.
Glassman criticized the press for contributing to investors' short-term mindsets through an obsession with printing top-10 and "hot-product" lists. Such a competitive and non-stop media cycle makes for inherent conflicts, said Glassman, who has written a column for The Washington Post.
"What I really want to tell my readers is to be diversified, understand market efficiencies, pay attention to taxes and pay attention to expenses," he said. "On the other side, you need to attract attention," he said. "If you're doing your job well, you should be doing both."
"It makes it more short term, more of a sporting event," he said.
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