I was reading an article recently that was asking if investors will ever trust Wall Street again. The author noted that the market's turbulence hasn't just destroyed wealth; it's also shattered our faith in the financial system itself.
Seriously? I'm not sure penny stock investors ever truly trusted Wall Street...or some mythical standardized financial system. We trust Wall Street to make us money and we trust Wall Street will lose us money too. But other than that, I can't imagine anyone seriously thinks Wall Street and its bankers are the litmus test for trust.
Late last year, Decision Research of Eugene, Oregon asked Americans how much they trusted bankers and other Wall Street leaders "to reduce the risk of the financial challenges the country is facing now." On a scale of 1 to 5, (1 representing no trust at all), the rating averaged a princely 1.7.
Now granted, I don't know what the number was before the market meltdown so I can't really say that 1.7 is low. Had a test been done in the summer of 2007, maybe the average penny stock investor would have pegged Wall Street lenders at 2.5. I think that's being generous.
And believe it or not, faith in the financial system is what makes the average mom-and-pop (read penny stock) investor...actually invest. Faith that good people are rewarded and that so-called bad people are punished.
Sadly, the recent market melt down hasn't really played out that way. Many, many average North American investors have seen their portfolios hammered while many forlorn Wall Street CEOs and bankers have seen their annual bonuses soar thanks to generous taxpayers.
"A belief that the world is fair and predictable is necessary in order for people to delay gratification and to make investments that will pay off in the long run," said James Olson, a psychologist at the University of
Western Ontario.
The same article noted that when bad things happen, "people often prefer to blame themselves rather than believe they live in a chaotic and unjust world," said Dale Miller, a psychology professor at Stanford University.
After tech stocks crashed in 2000-2001, for instance, many penny stock investors kicked themselves for taking risks. This time around, however, even seasoned penny stock investors who followed the best advice were punished.
The stock market is a gamble. There's no other way to put it. You can get hammered in the best of times with the most exhaustive due diligence. At the same time, it's pretty tough to see your portfolio tank 60% only to see Wall Street firms parcel out billions in bonuses.
This hasn't been lost on investors. According to a new report from Forrester Research, customers of the biggest banks in the United States are the least likely to believe their financial institution does what's best for them as opposed to what's best for the bottom line.
Credit unions on the other hand ranked much higher than the big banks, as they have in previous years, with 70% of credit union customers saying their financial institution puts their interests first.
Chances are, well heeled bankers and Wall Street are not going to be receiving too many Valentine's Day cards from average Americans.
What are penny stock investors to do with their lack of faith in a system that is supposed to play fair, or at least have the appearance it is?
Maybe we can put a little trust back into a tried and true system that has been kicked to the ground lately. Buying and holding a diversified penny stock portfolio still makes sense. In this climate though, you may not see the kinds of short-term returns you've been used to.
In 1952, more than two decades after the Great Crash hit bottom, only 19% of wealthy Americans regarded stocks as the wisest investment choice. Most investors actually sat out the great bull market of the 1950s, when stocks gained 19.4% annually.
Even though buy and hold is allegedly dead, it just shows you that as long as you don't sell at the bottom and as long as you don't panic (and you clearly wouldn't do that if you've bought good penny stock companies with strong fundamentals) your portfolio will provide consistent long-term returns.
And I have more faith in that happening than I do in Wall Street admitting a mistake or being there to bail me out.
Copyright 2010 Stockhouse
