Life is good. When the market’s roaring upwards, you can sit back, relax and watch your personal portfolio chalk up the rewards. And, now, when things don’t look quite so rosy, it still doesn’t matter. After all, federal insurance will cover all of your losses… won’t it?
If you’ve never heard of the joys of federal insurance to protect against the downside of the stock market, then don’t worry – it doesn’t exist. But there are an awful lot of investors out there who think it does.
A Securities Investor Protection Corporation (SIPC) survey released in August found that 84 percent of US retail investors believed stock market losses would be repaid by some federal agency, whether it was the SEC, the SIPC or the government itself. When you’re living in that sort of world, it’s no wonder stock market investing seems attractive. Mind you, when the real world offers the opportunity of suing analysts for their upbeat opinions on the stocks they cover, it’s little wonder that retail investors are confused.
The strong belief in a federal bail-out is just one of the many worrying misperceptions held by a substantial number of retail investors, including the idea that they’re financially protected from all market fraud. What is even more worrying is the lack of change compared to similar past surveys. For example, the Investor Protection Trust found in 1996 that under one fifth of investors had any degree of financial literacy and most were at the mercy of their brokers, few of whom were properly checked out by investors.
Why, then, is this of concern to investor relations officers? After all, if more people buy into your stock then so much the better; pity their naivete but thank them for their support.
It’s a concern for a number of reasons. As any IRO worth their salt will know, a badly informed, badly educated investor tends to be a panicky investor when trouble comes calling. Sooner or later, most retail investors wake up to the fact that there is no federal safety net when it comes to market losses. And then sell in droves.
Despite the growth in the power and prestige of the investor relations function over the last few years, basic investor education doesn’t seem to be getting any better. This is not just the job of the National Association of Investors Corp and the like, it is the job of every investor relations officer out there – a better informed investing public means a stronger, more loyal group of investors for the future.
Finally, it is of particular concern because of the nature of the development of the market and regulation over recent times. IR web sites and Regulation FD may well encourage the provision of more information to the retail investor but what if those investors cannot begin to interpret the information being pushed at them? It is all very well making your CEO’s message to shareholders more accessible to a wider audience over the internet but it is a wasted initiative in the longer term if retail shareholders don’t have the tools at their disposal to dissect the story.
A handful of companies have fulfilled their responsibility here. IBM, for example, has for several years provided a ‘Guide to understanding financials’ on its IR web site, while Microsoft provides basic stock analysis tools on the net and consistently spins a ‘reverse-hype’ story to quell over-enthusiastic investors.
As more and more companies will note in their earnings releases over the next few months, short-term gains can sometimes lead to long-term pains. A similar lesson can be applied to providing information to retail investors. There is little point in spreading the gospel if few actually understand what the gospel entails. It is the job of every IRO to help investors interpret what is being preached. If that means being a little bit more blunt about the downside, then so be it.
