An Effort to Get the ‘Little Guys’ to Buy Stocks

When it comes to the stock market, more and more people seem convinced that mutual funds are the way to go. But at least one group believes that investors should be buying more shares of individual companies, and it’s trying to do something about it.

The National Assn. of Investors Corp. is an umbrella organization for nearly 8,000 investor clubs representing more than 140,000 people across the country. Members buy shares in individual stocks, using an NAIC formula that favors quality growth companies.

In June, the Royal Oak, Mich., group will kick off “Own Your Share of America,” the first of five annual publicity drives to spur more direct stock-market investments.

“This is a grass-roots effort to convince more people to buy stock in American companies,” says NAIC Chairman Thomas E. O’Hara.

The NAIC hopes to duplicate the success of a corporate-sponsored campaign in the 1950s that, O’Hara says, created a more positive public attitude toward stocks and helped boost the number of individual shareholders from 6 million to 20 million.

The NAIC itself stands to gain from greater public enthusiasm for individual stocks. Not only might the organization attract more members, but it also earns revenue from shareholder-conscious companies wanting to tell their corporate story at NAIC conventions or through advertisements in “Better Investing,” the group’s monthly magazine.

Still, O’Hara says, there are other, more fundamental reasons for wanting to see the ranks of individual stockholders rise. Small investors provide capital for existing businesses to expand, bring liquidity to the marketplace and help stabilize prices by maintaining a long-term outlook.

O’Hara cites a report by David L. Babson & Co., which runs the Kansas City-based Babson Group of Funds. It shows that individuals now have a much smaller proportion of their financial assets invested directly in common stocks (less than 20%), compared to the late 1960s and early 1970s.

And he points to a New York Stock Exchange survey indicating that individuals account for only about 20% to 30% of trading volume on the Big Board, down from the 80% range in the 1950s.

“Owning stocks is just about the most profitable investment an individual can make, yet people are continually reducing their stock holdings as a percentage of financial assets,” O’Hara says.

However, H. Bradlee Perry, chairman of David L. Babson & Co., points out that individuals still directly owned 53.6% of all U.S. shares at the end of last year, and another 9.2% indirectly through mutual funds. The balance was held by institutions other than mutual funds and foreign investors.

“The proportion of individual stock holdings has declined as pension funds have grown, but the shrinkage has been pretty darned slow,” Perry says. “Individuals are still a major factor in the market.”

While Perry agrees that individuals have been net sellers of stock for most of the past three decades, they haven’t been unloading shares as eagerly as the numbers might suggest. In many cases, they’ve been forced to sell, he says.

For example, the executors of larger estates often must sell stock (and other assets) to pay estate taxes--a more or less uncontrollable factor, Perry says.

Also, the wave of mergers, acquisitions, share-purchase programs and other forced sales during the 1980s removed more than $500 billion worth of stock from the market. As this activity began to abate in late 1989, net selling by individuals also slowed.

Of course, equity mutual funds also are taking a bigger bite out of direct ownership. According to Perry’s calculations, mutual funds accounted for 14.6% of the stock-market investments held by individuals at the end of 1991 (or 3.1% of total financial holdings), up from 10.9% (and 2%) a year earlier.

Younger investors seem even more inclined to go the mutual fund route, he says.

Direct stock ownership still offers certain benefits for individuals. With stocks, people have the opportunity to concentrate their assets in the very best companies they can find. Also, they can invest in small but fast-growing firms that are too tiny for institutions to bother with.

“Individuals tend to go into smaller companies, which typically return 2% to 3% more a year--an amount that can really add up over time,” O’Hara says.

As another plus, direct owners of stocks, unlike fund shareholders, can defer taxes on any capital gains for as long as they hold the investment. Also, individual owners don’t have to pay portfolio-management fees, as they would with a fund.

But mutual funds also enjoy certain advantages, including instant diversification and professional management for people with small amounts of money.

“Many individuals feel they’re at a real disadvantage to professional managers in buying or selling stock,” Perry says. “They see themselves competing with better-informed institutional investors who have a lot more money at their command.”

Perry believes that anyone with the time, skill and interest to pick stocks can do well by joining investment clubs such as those that follow the NAIC’s guidelines. But he figures that only one in five or so people is willing and able to make the necessary effort.

Even the NAIC seems to have taken this into consideration: It offers a closed-end growth fund for people not wanting to buy stocks on their own.