Back in the last '60s, when the Dow was flirting with the 1,000 mark for the second time around, some money managers devised a concept called "one-decision" stocks. These were equities in companies -- Polaroid, Xerox, IBM, and the like -- that would push upward come DJI hell or high water; hence they never had to be sold. Now many one-decision stocks have fallen into disrepute (Polaroid dropped from $149.50 in 1972 to $19 a share in 1980), and the investment tactic has been quietly shelved.
This spring the Dow Jones Industrials again assaulted the 1,000 barrier -- the sixth broad push in 15 years. It's tempting to dismiss the Dow's on-again, offagain wooing of four-figure status as irrelevant (which, rationally, it is), but markets are influenced to some degree by the behavior of the Dow, as creaky and unrepresentative as it may be. If the 30 Industrials were to break 950 on the downside again, for instance, undoubtedly the majority of listed stocks would turn down with it. It's sort of a primitive reaction stuck in our brains; like log fires, the Dow is something we can't help being drawn in by.
Smaller investors, however, would do well to set aside their fixation with the Dow and open their minds and trading techniques to new relationships. Without a doubt, a different kind of stock market was developing as the Dow backed and filled during the first quarter. It will be critical for the individual as well as the institutional investor to recognize how times are changing.
Two distinct characteristics are emerging: (1) The price action of the new breed of small growth companies is not responsive to typical market cycles (in the old sense of, say, steels or retail stores passing in and out of investment favor). (2) Institutions are eschewing fast-growing stocks because of the difficulty of establishing positions due to the small capitalizations of these companies.
For the individual investor looking toward a comfortable retirement, the airthmetic speaks volumes. INC. has already demonstrated in its "Investing in the INC. 100" studies over the past three months that even unsupervised, the 100 fastest-growing companies can earn capital gains of 40% to 70% per year. Match this return against the typical 10% to 15% performance of a necessarily conservative pension plan pool run according to the "prudent man" rule, and compound for, say, 20 years. Ten thousand dollars at 12 1/2% would become a respectable $105,450. But at an increment of 70% per year, the same sum would end up at a more spendable $406,423.140. That's 406 million. With compounded differences of such staggering dimension, any person who doesn't know how to buy and sell stocks on his own would do well to learn in a hurry.
Institutions are already being left behind as high fliers fly even higher while the Dow sags. For example, the ratio of shares held by institutions vs. total capitalization of the half-year's six leading gainers on the Amex and O-T-C was (as of this writing) about 1:18. Besides the predictably unimaginative thinking of the managers of mutual funds, trusts, endowments, pension funds, and the like, the practical challenge of accruing a meaningful block of stock in lightly capitalized companies (the six stocks calculated above averaged 2,406,000 shares outstanding) has kept them from such quick-profit opportunities.
Compare this with, say, Eastman Kodak, nearly half of whose 161,382,000 shares are held by institutions. The market in EK can and does fluctuate within only a quarter of a point while tens of thousands of shares change hands. Large-block action is much more to institutions' liking. They are able to establish a substantial long position with facility and, more important (since selling is more difficult than buying), are able to dispose of that position over a brief period of time without unduly depressing the price.
The problem institutions have to face is that their favorites are not going to quintuple in 12 months, as many lesser-capitalized companies already have done and likely will do again. Big buying and big selling would play havoc with the price of such stocks, making them virtually impossible to consider in overall investment strategy. Besides, institutions aren't used to analyzing start-up situations that may show earnings losses for several quarters or even several years. They like to see a long history of production and earnings. But many emerging companies can't reassure them in these areas.
It's a new twist: What the "big boys" are doing won't concern us as much anymore. Two separate stock markets are developing, and multimillion-dollar portfolios are going to have to consider it a job well done any time their yearend report manages to outstrip inflation. In this context it is interesting to note the percent of the 20 largest-capitalization stocks for the first quarter of 1981. In a period that saw the NASDAQ Composite up 3.9%, this score of stalwarts averaged a net loss of 5.4%; the performance differential was 9.3% for the quarter alone.
As this column was written it looked like stocks in general were tiring. Technical signals were suggesting that an adjustment was in order. If you held Dow stocks or other blue chips that are in favor with institutions, some lightening or hedging would have been called for. But what is comforting about the new atmosphere in the market is that if you hold the right stock, you don't care what the Dow does. The "right" stock -- and there are many such creatures nowadays -- will hold its own against a general decline and will be first to resume an uptrend once the selling wanes. There are too many buyers waiting, and prices of growth stocks simply haven't been and won't be staying down for long. Which means we are back to the "one decision" days of the big mutual funds, except that the one decision, happily, is ours to make, rather than some big money manager's.