The Rising Risk of Stock Ownership

By Rob Isbitts via

Earnings Bombs, Etc. Expose Growing Concern





As far as I know, these are not actual headlines about big, one-day drops in individual stocks.  But they could be.  And they describe something I think is gradually bubbling up underneath an investor psychology that can best be described as complacent.  As someone who is immersed in the investment markets each day, there are things you notice anecdotally that, when you actually run the data on them, you realize you were not just imagining things.  This is the case when it comes to the rising risk of individual stock ownership.

Here is a summary of what I see, and some data to back it up:

  1. The long stock market advance since the Financial Crisis low in 2009 has encouraged investors to own, and perhaps speculate, in individual stocks.
  2. This has bruised the mutual fund industry, which has had steady outflows of assets.  Translation: paying someone to diversify your stock holdings for you is a lower priority than in the past.
  3. ETFs have burst on the scene, but the overwhelming emphasis of the advisors that use them is to simply “buy the market,” such that investment portfolios are steeped in the largest names in the major stock indexes, principally the S&P 500 Index.
  4. The stock bull market has created an environment where a couple of bad eggs in one’s portfolio will not create much of an issue, since the overall market is a tide lifting most boats.
  5. The bull market won’t last forever, and changes in the way individual stocks are battered in a heartbeat following a perceived piece of bad news (earnings, product announcement, government intervention, commodity price changes, etc.) are not yet appreciated by many investors.

Essentially, it’s a case of the trend being your friend, such that early signs of tomorrow’s big problems are drowned out by the euphoria.

Above, you can see two of the recent quick stock collapses that made temporary headlines.  On top is Boeing, which gave back half its gains of the past year in just a couple of weeks, following the tragic mechanical issues in one of its aircraft models.  Below that chart is Facebook, which rose over 34% in under 5 months last year, then fell over 40% from that summer 2018 peak as a variety of privacy issues, growth concerns, and worries about government intervention piled on the stock price.  Facebook “popped” back up, but still lies only about 4% above where it was a year ago.

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