It's the most objective industry in the world.
If your numbers stink, you're out.
If your numbers are good, you get more money.
It's the most Darwinian.
It's beautiful.
It's brutal.
It works.
All right, guys, let's roll.
Buy five HMTT at an eighth.
See what happens.
It's against puts.
We're fine.
I want to see if you can even buy it.
Colgate opens up at eighth.
IBM August 95 calls.
I want an offering on 1,000.
I want an offering on 1,000.
I want an offering on 1,000.
Yes.
Double down.
Double down.
I want 10.
I want 1,000.
Fives are 70 and a quarter.
It's X.
It's evidence.
Sold.
A new faith is sweeping the country, gathering strength by the day.
It's 25.
It's 25.
Okay?
It's 25.
Over the years, as a financial reporter, I've watched money manager Jim Cramer turn into
one of the market's most avid missionaries.
Colgate.
Colgate.
Colgate.
Get me.
Get me.
Get me.
There are 1,000 stocks out there that could make you rich totally independent of what
you do for a living.
All right?
If you had done Merck in the 1950s, just bought 10,000 shares of Merck instead of buying
U.S. savings bonds, you would not ever have to work again.
Forty-six and three-quarter bit cascade.
I believe that stocks like Bristol Myers had they existed 100 years ago.
There would have been no Marx.
There would have been no communism because what's happened is these stocks have made
many millions of people rich, and they're going to do it again.
Sold.
Take a look around.
We've all become hooked on the stock market.
Within about 14 months, made about 30 percent, 40 percent of my money.
I'm up 35 percent in three months.
Yeah, I mean, I did 178 percent last year, so I'm doing well.
I really enjoy it.
I got it.
I got it.
I got it.
The 1996 model stock market is the most overwrought, overexcited thyroid case, if you will, we've
ever seen in this country.
Less than five-eighths.
We're now using the stock exchange as a kind of souped-up, turbocharged national piggy
bank and retirement plan.
People are in the market today because they're afraid not to be in the market, and this represents
a tremendous change in the psyche of the country.
Funding for Frontline is provided by the Corporation for Public Broadcasting and by annual financial
support from viewers like you.
This is Frontline.
Okay, you want to pay 52 for 4,300 general mills, that's for WD, right?
I got you, baby.
For most of this century, the stock market belonged to insiders, men who spoke in a coded
language and worked in the arena we call Wall Street, but today, the stock market belongs
to all of us.
During a bull market that's lasted 14 years, a time that's seen the Dow Jones Industrial
Average rise more than 5,000 points, tens of millions of Americans have become investors.
That would be a 50% rate of return annually.
There's never been anything like it.
I can make twice as much money in the stock market as working real hard in my regular
business, and so I think it's an opportunity, and it's cleaner, it's less people, it's
your brain and how much time you want to put into it.
There's a feeling like everybody's making all this money on Wall Street.
How do I get in on the action?
I have an office on Wall Street, look out the window and I can see people queued up
to visit the stock exchange, to kind of go in in the visitor's gallery and watch their
wealth fructify.
They want to go in there and watch the stocks go up.
It's like they're visiting some French cathedral.
They're out there taking pictures in front of this building, this mecca.
Wall Street is one of the great symbols of the free market, but it's always been something
most of us feared rather than embraced.
That's what's changed.
Today's market, we believe, is there for us, helping to send our kids to college or to
provide our retirement nest egg, or to make our lives better in a hundred different ways.
This is corporate America at its finest, where the little guy gets to go in and buy a piece
of Walgreens and be co-owners with all the rest of the Walgreens, Charles and all those
very nice people.
And we are part owners, we're not gambling.
Good morning everybody, this is Gary Goldberg on Money Matters.
Welcome to the program and we are here to...
Today everybody's a part owner.
Because for the first time, many of you have decided to invest.
And they all want to talk about it.
Hello Sharon, good morning.
Hi, thanks for taking my call.
You're welcome.
We currently have most of our savings invested in the stock market.
We're investing, making a profit and selling it so we can pay off our credit cards, set
up retirement and the college for the children.
We found Sharon and her family in upstate New York.
They are modern American investors.
We don't have any retirement, owning our own business.
That's why we're in the stock market, we're trying to make some aggressive money very
quickly.
Russ works very hard.
It's almost demeaning that he works this physically hard, he should be more mental.
How much of your savings are in the market right now?
How much of your life savings?
Almost all of it.
Almost all of it.
Almost all of it, yeah.
As the whole industry continues riding high, but there are some clouds on the horizon.
Gee, IBM's 95 and I see Nike went up to 108 also.
I could sit here all day and watch this and just watch them go up and up.
Inflation remains well in hand.
Guys, come on.
111 and seven eighths, down two and five eighths.
It was 125.
I guess everything's still falling.
Russ started watching CNBC and I put it on at the carpet store.
I just put it on one day and I just watched the ticker tape go by.
The stocks were going crazy.
Some of them were starting at 10 and going to $80 a share.
Something like Microsoft, when I first started watching it, I think it was almost $50 a share.
What was that about?
A year and a half, two years ago.
You sit there and watch that stock go up to $120.
You get kind of giddy about it.
What kind of stock do we have?
Microsoft.
Yeah, what are the call letters?
MSFT.
MSFT.
If you look at the stock market, the overall, when it started back 100 years ago, the stock
market was here.
It's 1996 and it's up here and it's gone up and down, but eventually it has ended on the
up.
Sharon and Russ live in a small and modest house, but they have big plans.
This is our dream house.
Look, here's the plans inside.
This is where we're going to live in the back.
It's a nice big great room.
It's got an arch window up the stairs.
We all picked out our own bedrooms.
We look at it when we're off to work in the morning and when we come home tired.
It's just like an incentive.
Isn't that beautiful?
Isn't that nice?
The investment industry has aggressively courted baby boomers like Russ and Sharon, and no
part of the industry has been more aggressive and more successful than the mutual funds,
which offer people the alluring prospect of handing over their money to an expert, a fund
manager, and watching him make dazzling gains.
85% of the money now in mutual funds has come in since 1990.
So far in 1996, we've had more money come in into stock mutual funds than in any previous
year in history.
Good morning and welcome to another mutual fund conference.
It's a pleasure to see so many familiar faces and welcome you back, a little concerned about
the beautiful nature of this room and can't help but wonder what that tells you about
where we are on the market cycle.
By the spring of 1996, when we attended this mutual fund conference, the fund industry
had topped the $3 trillion mark.
That's more than the gross national product of France or Germany.
And much of that money has streamed in in just the last three years, as the market has
made some of its most spectacular gains.
There are 7,000 individual mutual funds.
There are 400 mutual fund families, all with their product wares spread out for you.
There are bond funds.
There are emerging market funds.
There are Canadian resource funds.
And if you want to invest in something and you can't find a fund for it, wait 15 minutes
and someone will devise a fund to sell to you.
We have 15 no-load mutual funds, the Emerging Growth Fund, Capital Appreciation Fund.
We don't invest in companies involved in the manufacture of weapons or the production of
nuclear energy.
Value Fund, Growth and Income Fund.
We generally tend to pick stocks that pop up on our buy list as a result of our computer
screens.
Government Fund, Money Market Fund and Reserve Fund.
I have to ask you, I've never heard this before, I've never heard of anybody with a Nebraska
tax-free fund.
Well it's both federally and state tax-free and invest in municipal bonds.
But you have to live in Nebraska to get this.
That's right.
Is it just our imagination, or do these funds all seem to do nothing but go up?
The small cap fund, which is directly correlated to our managed accounts, is up 36 percent.
It was up 20.41 percent.
Last year it was up about 59 percent.
A thousand percent or something?
I don't know if it's that much, but it's certainly approximate that.
And the better these funds do, the more the people who run them seem like superstars.
Five years from now I think you'll be able to name the top 25 mutual fund managers in
the country in the way that you'll be able to say who runs IBM and who runs Ford Motor
and who runs Chrysler.
There's a tremendous pressure on the mutual fund managers to get the top performance on
a quarterly basis, certainly on an annual basis, because if they don't, they'll lose
their shareholders.
They might even get fired.
Yet if they do very well, they can become very wealthy very young.
The competition is fierce, and the top mutual fund managers are like modern-day alchemists
creating magical market gains.
And right now no one has the golden touch more than this man, Garrett Van Wagner, who
runs a one-man shop out of San Francisco.
Then that's my final offer.
Dozens of stocks cross Garrett's desk every day, everything from U.S. robotics to the
Rainforest Cafe.
Another Hard Rock Cafe version, except this time it's got a jungle motif.
Do you think that has a lot of staying power, the old jungle motif?
How many ways can you serve a hamburger, you know?
No thank you.
Next.
Here's somebody who has a great track record, very smart guy.
No thank you.
He's done very well for himself and his shareholders, coming out of nowhere basically in the last
two or three years.
Everybody else wants to be a Garrett Van Wagner, too, and get along while things are going
well.
Can I get your autograph here?
Garrett Van Wagner.
Hi, I'm John Goodton.
Nice to meet you.
I'm Kim McAlister.
I wanted to meet you.
This is why I came to this conference.
Well, that's great.
I'm glad we got a chance to meet.
It's hard to consider myself a superstar in anything, but I mean that's the title that
has been thrown out by various people, and I guess there's the old line of everybody
gets 15 minutes.
The thing that's disconcerting is I don't know if I'm on my 14th minute with 59 seconds
or I'm on my first minute.
Great.
Thank you very much.
Van Wagner struck out on his own last January.
By the summer, he had the number one fund in the country, up 60% in less than six months.
The fund started with $100,000.
By May, he had a billion dollars under management, and the money kept pouring in.
At the peak, we had some days that were over $40 million in a day.
At one point in time in late March and early April, the funds were doubling every day.
Fund managers at the top of their game become gurus, dispensing their wisdom on eager investors.
Their every word is listened to with rapt attention.
What's going to happen to the market, people want to know?
What companies are about to explode?
What is he looking for in a stock?
We're looking for being in small cap growth, companies that we think are the best and the
brightest candidates out there.
These are going to be the next Microsoft, so to speak.
Hey, buddy.
Hey, Rick.
How are you?
Good to see you.
Getting an audience with Garrett can be a critical event for hungry young companies.
Garrett Van Wagner.
Nice to meet you.
Oh, there it is.
Our device.
Innovative solutions for cardiac arrhythmias, that's what we're about, primarily driven
by the biphasic waveform.
Just tell us a little about why you were up there.
Why were you visiting Garrett just now?
Well, he is a potential funder of our company.
We're in the process of doing a financing, basically selling stock, and put it simply,
we're up there begging for money.
This business is about human life, it is about quality of life, and it's certain experiences
like that that bring that home to us, the corporation.
You are the CEO of the company.
That's correct.
You're the top guy in this company.
Is this the most important thing you can be doing right now?
It absolutely is the most important thing I can do.
Wonderful.
Thanks again.
It's good seeing you again.
Appreciate it.
What I find very interesting about the mutual fund managers is that here are people who
are the new masters of the universe.
They're managing billions, or in certain cases, tens of billions of dollars.
Wall Street is really running the country today in many ways, and this is a pressure
that the corporate executives feel.
And they see it time after time, if they don't perform, they're out of there.
Companies will do cartwheels to please powerful shareholders, and when mutual fund managers
want stock prices to go up, they feel they have a right to demand it.
Don't forget the mutual fund guys keep their job only if they pick the right stocks.
You can make companies into the right stocks by demanding certain changes, by demanding
changes at Sears, by demanding changes at Xerox, by demanding changes at IBM.
Shares like last year's announcement that 40,000 workers would be downsized from AT&T,
the share price instantly bounced up almost $3.
The merger of Chase and Chemical Banks, 12,000 jobs lost, but Chase shareholders made over
a billion dollars.
Directly or indirectly, the immense influence of the mutual funds were responsible for these
upheavals.
And sometimes, the employee a company fires is also a shareholder who makes money when
the price goes up.
Consider for instance Mary Jane Range, a vice president at Citibank.
She was laid off as part of a restructuring two years ago.
It was going to be the place I retired from.
It was a company that I had targeted and wanted to belong to for a very long time.
Mary Jane, who is divorced and single, has all her savings in the stock market.
And her biggest holding is in the corporation that cast her out, Citicorp.
How did you feel about holding the stock of this company that had laid you off?
I never made the connection.
I never made the connection that this is stock in a company that just took away my ability
to earn a living.
After the downsizing at Citibank, the company's stock, which had hit an all-time low, rebounded.
The stock, as I recall, went down as low as just slightly below 12.
$12 a share.
$12 a share.
And now where is it?
$89.
$89 a share.
All right.
Today, she's her own boss, a partner in an executive search firm matching up candidates,
often people who've been downsized with potential employers.
How's your job search going?
In what I do now, I am totally reliant on myself.
I don't have a pension.
I can't even conceive today of being in a position where you would have total job security.
So what do people have to do?
They have to take care of themselves.
No one will take care of you any longer in this country in terms of long-term job security,
withering pensions.
And where does the market fit in that scheme?
The market is an enabler.
It is a way for people to increase their accumulated wealth and to take care of their future.
24 and 7 eighths.
It's got to go back up.
It's got to.
It was already up there.
Everything has got to go back up.
Dorothy Free was also downsized after many years as an employee at IBM.
She too has cast her lot with the market.
I have another job now as a secretary.
I downgraded my salary.
Something wicked.
This is it.
I've only got a couple more years to work.
So you put money away in investments.
And then if you ever need something when the time comes, you do have some money put away.
I think everything is dropping.
Dorothy is Sharon Gourney's mother.
Together they have a neighborhood investment club, one of 10,000 across the country that
have been formed in just the last year.
Fortune 500.
Here's the America's 100 fastest growing companies.
I saw an article in Women's Day magazine how to start an investment club and I said to
my mom, Mom, do you want to start a club with me?
Let's do this.
We could get the Wall Street Journal and see what the high was.
Why not take a shot at it?
Why not be with everyone else that everyone's making so much money, a lot of money?
For the first time, average Americans like Sharon and Dorothy see the stock market as
both necessary and safe.
I don't think savings banks are the way to go anymore at all.
I don't even think you should have a checking account in the bank anymore.
I was doing a radio show in Kansas City recently and this woman had gotten into 20th century
ultra which is probably about the most aggressive mutual funding you can get and it was up about
50% last year, something like that.
She said, even if I don't get 50% it's okay.
If I get 25% that's okay.
I said, how about if it went down 25%?
No, no, not down.
I'm not greedy.
I don't have to get 50%.
In these people's minds, the idea of it going down 25 or 50% is nonexistent.
If the stock market does drop, that's okay.
It will go back up again.
It has to because the economy grows all the time.
I'm very careful with my money.
I would not ever gamble on anything.
I will not gamble.
People, I think people should expect the stock market to deliver good returns over time with
the understanding from time to time it will tear your heart out.
The stock market is a little bit like a savage beast.
It is a nice thing to think you've domesticated but every once in a while it remind you suddenly
but maybe by taking your hand off that it is not the pet you think it is.
So how did we come to trust such a savage beast?
The tremendous crowds which you see gathered outside the stock exchange are due to the
greatest crash in the history of the New York stock exchange.
The crash of 29 turned out to be the greatest market disaster of all time but there was
a big difference between then and now.
Main Street was really not involved in the stock market in the 1920s.
It was considered the sort of thing that racy and rather corrupt city slickers did.
It was not considered a place for the whole family as the stock market is considered today.
And so when news of the crash came probably a lot of people in small towns and farms across
America felt a sense of grim satisfaction.
But nobody knew how bad it was going to get.
The crash led to the depression which affected everybody and the depression created a set
of financial habits that would last generations.
We became extraordinarily risk averse.
We hoarded what we had.
We never borrowed and as for investing it was a laughable idea.
The years went by.
The New Deal came and went.
World War II began and ended.
Your children grew up and had their own children and color television was invented.
All before you recovered the money you had lost in the crash of 1929.
It took 25 years for the Dow to reach 381 which had been the pre-crash peak.
The year was 1954.
The market came back in the 50s more than tripling by the end of the decade.
But the old financial habits of the depression were still with us.
Besides didn't Americans have lifelong jobs and guaranteed pensions?
What did they need the stock market for?
It wasn't until their children, today's baby boom generation, came of age that the
stock market started to matter.
Why?
Because by then there was a force at work that seemed to practically demand it.
Every generation I think has a defining economic event.
For the generation before the baby boomers the defining event was the depression.
And that left people very preoccupied with jobs and it created a generation of people
who were very security oriented.
When the baby boom generation left school the first great defining economic event was
the great inflation of the 1970s.
The erosion of our confidence in the future is threatening to destroy the social and the
political fabric of America.
The fear of inflation was everywhere.
People believed and you could go back and read articles that were written at the time
that there was no way the inflation rate was ever going to be brought under control.
As inflation surged people watched their savings erode in the bank, which meant they had to
do something different with their money, either spend it or invest it.
A new psychology was taking hold in America.
It was really at that point that stocks began to lose their stigma as a very risky investment.
And so when the modern bull market began in August of 1982 a generation sat up and took
notice and one man more than any other became the new Pied Piper for the millions of baby
boomers who were poised to become investors.
He managed a little-known mutual fund called Magellan.
His name was Peter Lynch.
Peter, what did you do that the other fellows didn't do?
Well, I'm not sure what the other people were doing, Lou, but what I've tried to do is I've
worked as hard as I could.
I've visited over 200 companies every year.
But hard work was just the beginning.
Lynch also had an incredible instinct for picking stocks that were about to explode.
And what were these great picks of his?
Well, right over here we have Kentucky Fried Chicken, the old kernel.
I remember in the early mid-60s when I started Fidelity this was one of the single most exciting
stocks.
I mean, it was more exciting than Netscape.
It was more exciting than Microsoft.
It was better than a microprocessor or anything.
And then right next to it we have one of my great companies of all time, Dunkin' Donuts.
Amazing company, made great coffee and they put it in a china cup.
They didn't serve it in a crummy paper cup.
If somebody invents a new logic chip, I'm not going to know about it.
No one's ever going to invent a better donut.
One reason Lynch became the stock picker for the middle class was that he had such middle
class tastes.
He used to prowl shopping malls and watch what people were buying and what stores they
were visiting.
This is like the New York Stock Exchange right here, you know, looking over here at Athlete's
Foot.
I mean, here's a chance for the public if they knew something about Nike.
The stock went to over 100.
Here's one of my biggest stocks of my life, Taco Bell, right over here.
And here's Cinnabon.
I'd like to research that if that went public.
Well, we can do a little research right now.
One Cinnabon, please.
Peter Lynch is a genial, open, reassuring person.
You know, a good dose of Peter Lynch and you feel empowered.
The stock market looks easy, investing looks fun, mutual funds look like a sure thing.
If the mutual fund industry had not had a Peter Lynch, someone would have had to gone
out and invent Peter Lynch.
I mean, I'd rather have this than a logic chip.
People can understand what Lynch was all about.
Sometimes the bets Lynch took were breathtaking.
Well, Joe, this is my greatest stock ever for the fund.
This was the largest position in my fund in Magellan in 1982.
Everybody thought I was crazy.
Remember Chrysler in 1982?
Me?
I'm in the car business.
It was on the verge of bankruptcy.
The U.S. government had to guarantee its loans just to keep the company in business.
Lynch put $23 million, 5% of his fund, on Chrysler and its new minivan.
And what did the Chrysler bet add up to?
And all of his other great stock picks?
Well, if somebody invested $1,000 in Magellan in May 31, 1977, the day I left that thousand
would have been 28,000, May 31, 13 years later, 1990.
That's a pretty incredible... I can see why that would attract a lot of attention.
I was happy.
What that means is that the Magellan fund was up nearly 3,000% in the 13 years Lynch
ran it.
But all of Wall Street was booming in the 80s.
Corporations were merging and acquiring and taking each other over.
Stock prices were skyrocketing.
The Dow more than tripled between 1982 and 1987.
It seemed as though the bull market would go on forever.
And then...
They're calling it the Mundy Massacre, the worst drop in Wall Street history.
By the closing bell, the Dow Jones Industrial Average was in the steepest fall in its 103
year history.
It was October 19, 1987.
That's me with the beard outside a Fidelity office in Boston watching the Dow self-destruct.
Like millions of other Americans, I thought this was the end.
I remember going out at lunchtime to the local Fidelity office and seeing a huge crowd gathered
around watching the ticker tape in shock that the market could fall 100 points and then
200 and then 300.
There was no breaks on this thing.
I was very well prepared for the crash of 1987.
My wife and I took our first vacation in eight years and we left on Thursday in October.
I think that day the market went down 55 points and we went to Ireland, first trip we'd ever
been there.
And then on Friday, because of the time difference, we'd almost completed the day and I called
and the market was down 115.
I said to Carolyn, if the market goes down on Monday, we better go home.
It went down 508 on Monday, so I went home.
So in two business days, I lost a third of my fund.
But in the end, the 1987 crash turned out to be, oddly enough, rather reassuring.
Here we had, for a single day, probably the biggest drop we've ever had in market history,
and nothing happened.
And in time, and really not so long, the stock market got back to where it was.
And that led to the feeling that in the long run, being in the stock market is great, that
weak markets are buying opportunities, not times to sell.
This wonderful event in 1987 is what people today are carrying around in their heads.
Don't worry if the market goes down, nothing bad can happen.
After the crash, American investors embraced the market and especially the mutual fund
industry with renewed fervor.
Today one in 50 American households has money in the Magellan Fund.
And the customers of Fidelity Investments alone constitute some 4% of the country.
There's a huge amount of money that flows through here.
I mean, we're talking about billions and billions of your money, America's money.
Absolutely.
We do, you know, it's public information, we do between 5% and 7% of the trading on
the New York Stock Exchange.
Comes out of this room.
This room, right over on here.
These people.
You got it.
These people.
After he retired from Magellan, Lynch remained a fanatical popularizer of the stock market.
But he had one important caveat, you needed patience.
My best stocks have been the third year I bought them.
Not the third week, not the third month, the third, fourth year.
People want something to happen in a week, in two weeks, it doesn't work that way.
You got it all, KNBR 68, San Francisco.
It's only been six years since Lynch left Magellan, but today's fund industry has a
whole different mindset.
Damn it.
Yeah.
MDI, we're going to try to cross 75G, 7A's, the figure.
Okay.
Do you need to be involved either way?
No, thank you.
Asking?
No.
No, thank you.
No interest?
No interest.
Yes.
No, thank you.
Next.
Hey, if you hear of any pieces of Cardiac Pathways down in the hole this afternoon, let me give
me a call, please.
AAS, you sold a whopping 800 shares of 32 and 5A's.
That's what I like.
Beautiful.
See you later.
Thank you.
God bless this country.
Garrett Van Wagner is still the new kid on the block, but the comparisons have already
begun.
Yes, I do.
How do you feel when you get compared to Peter Lynch?
A little embarrassed, a little bit surprised, and flattered, I guess would be the things
that come to mind.
He's a legend in this business.
Does he want to come out of the position, or is it just trimming?
It's going to be a long time before I'm willing to sort of accept that kind of status.
I'd like to do it for 10 or 15 years first.
But Garrett won't be given that kind of time.
In the overheated market of the 90s, fund managers are scrutinized not just year to
year, but week to week and even day to day.
This is not a charitable business, charitable institution.
By the summer of 1996, Garrett's fund had long since hit its peak of 60% and was stumbling
badly.
Yeah, 45, under 45, give me a holler.
Hundreds of people who came in at the top were losing money with Garrett.
Right.
I want it flat on its butt.
How much did you lose yesterday?
I lost about 18 million in the big fund.
No.
Too high.
And that was the worst day you've had since you opened for business?
Worst day I've had since I've been open for business.
You've got a tremendous amount of money in that fund that came into the fund after it
was up 40% or 50% or 60%, with the expectation that that's what the future is going to look
like.
My guess is as he got close to being up 60%, he probably raised 80% of the money he has
under management, so it's quite likely that the overwhelming majority of his investors,
their first taste of his performance was a sharp setback.
Under this kind of short-term pressure, Garrett doesn't have time to buy and hold the way
Lynch did.
His strategy is all about moving in and out of stocks quickly, sometimes in a single day.
As he's taking the pulse of the market, trying to stay one step ahead of it, it's high stakes
poker.
I've got one more for you today.
I've got 25,000 RXT to buy with a six top, please.
What's particularly dangerous about the present mutual fund boom is what is called investing
is really speculating.
The techniques are more about trading rapid turnover, paying any price for a stock as
long as it goes up or behaves a certain way.
It is about crowd behavior and stock price behavior, not about analyzing the underlying
businesses.
God bless this country.
Let's feed the old ducks while they're quacking.
The companies Garrett is investing in aren't Dunkin' Donuts and Kentucky Fried Chicken.
They are mainly technology and healthcare stocks that most of us have never heard of.
HNC software has gone from up one to up seven and a half in about a minute and a half.
New companies with little or no track record.
Marking them up.
The way the fund industry has changed has been to liberate fund managers, to pursue
hot performance anywhere they can find it.
And the result of that is when you buy that fund, you have no idea what that fund manager
is going to do with your money.
He's free to put it in almost anything.
That's what I like.
Garrett's stock picks are among the most vulnerable and volatile around.
But at the end of the day, they can produce eye-popping results.
Oh my God, look at Integrated Systems today, up eight and three quarters.
What did they discover, gold?
Do you make money today?
Yeah, we made good money today actually.
We had some real high flyers today, so we had a good day today.
Do you have a guess how much?
I'm going to say we made, we probably made about 13, 14 million.
That's going to be a guess today?
Actually, he guessed wrong.
It was more like 22 million.
Not bad.
Not bad.
The problem is that all the mutual fund managers, I think, are trapped in this rather deadly
vicious circle that the more successful they are, the more money flows into their mutual
fund.
The more money that flows into their mutual fund, the more difficult it is for them to
beat the market averages or even to match their own past performance.
And I think that we may see future situations like that of Jeff Vinick at the Fidelity Magellan
Fund where mutual fund managers will try to do very strange and unconventional things
because it becomes increasingly difficult to outsmart the averages.
Jeff Vinick was a young whiz kid at Fidelity when he inherited the Magellan Fund in 1992.
Within three years, Magellan had ballooned to over $53 billion, making it by far the
biggest fund in the country.
In early 1996, Vinick made a dramatic move, shifting Magellan heavily into bonds and out
of stocks.
He was betting in effect that the bull market was about to end, but he bet wrong.
Jeffrey Vinick made a bad guess and bought bonds and missed out on a truly wonderful
levitation in the stock market and had the epaulettes of a celebrity strip from his shoulders
and left Magellan Fund.
The man who runs the world's largest mutual fund has resigned, Jeff Vinick.
Jeff Vinick's departure should send up cautionary flags for the mutual fund investor.
Magellan's returns this year have been well below most other comparable funds.
His departure means that people are really not willing to take short-term underperformance
in the expectation of future return.
I think that's the really scary thing, that he really only underperformed for a couple
of quarters.
The public's impatience for big gains is so great that many people have taken investing
into their own hands.
The internet is crowded with hot stock tips, financial chat rooms, and lots and lots of
so-called advice.
One of the most popular sites on the net is an online investing forum called the Motley
Fool.
Its founders, two brothers named Dave and Tom Gardner, claim that if their subscribers
invest their money the Motley Fool way, they can count on 20% growth in their portfolios
per year, guaranteed.
We've identified a couple mechanical investment approaches which can be used by anybody, take
only about 30 minutes a year, and for more than 25 years have returned that 20%.
And we don't see any big change in the next 25 years.
So when we teach that approach, we're teaching people financial self-reliance.
The Motley Fool is based in a townhouse in Alexandria, Virginia, and staffed by 20-somethings
who like the Gardner brothers are true believers in the market.
They lead their 250,000 subscribers in a vigorous hunt for the next big winner.
Microsoft 10 years ago, had you bought it, not traded it with your broker recommending
that you trade it, not in a mutual fund where it would have been diluted by 60 other stocks.
Had you bought it, it's grown at 60% a year.
So $10,000 is worth a million dollars 10 years later.
The problem is, how do you know which of the thousands of hot stocks out there are going
to turn out to be the next Microsoft?
That's the hard part, and it's something Motley Fool subscribers found out the hard way.
The company was called iOmega.
In early 1995, it came out with a jazzy new computer device called the ZipDrive.
Motley Fool subscribers fell in love with the product and started an online bulletin
board devoted exclusively to iOmega.
In this electronic hothouse, the stock caught fire.
And so we bought the stock at two and a half, added it to our online portfolio, and over
the course of the next year and a half, it ran up as high as 55.
When the stock was at 55, our $5,000 investment, think about it, was worth over $100,000.
As the stock attracted more and more attention, the Motley Fool chat board became a frenzied,
giddy place.
The more iOmega went up, the more of their livelihoods people poured into the stock.
By 1996, the iOmega phenomenon had spread well beyond the internet.
Last summer, at a Charles Schwab office in San Francisco, people were talking about little
else.
iOmega was the talk of the town, so to speak, on the stock market.
And I would read about it, and I would see that it would rise in incredible amounts in
a day.
I bought it at 24, and it went up to 80, and it split.
And after it split, it went back to 54.
And the next morning, I woke up and called up the broker, and it was at 55.
And I was like, this is kind of silly, but it's great, you know.
But what had the company done to deserve this kind of run-up?
Not much.
It was a three-product company with profits of only $14 million.
But at the peak of the frenzy, iOmega's stock was worth over $5.5 billion.
Overprices going up caused people who would not have dreamt of buying them when they were
down to go out and buy them, because after all, they will continue to go up.
And the manifestation of this psychology in the marketplace has been an extraordinary
array of overpriced specimens, companies that changed hands at 600 times the sum of money
they can expect to earn this year, literally things that are seen once, twice, or three
times in an entire investment lifetime have come to pass in 1996.
It has been a living museum of speculation.
In iOmega's case, it was a bubble that was destined to burst.
And eventually, it did.
And I watched it go from 55 to 54 to 53 to 52 to 51, all the way down to like 48.
And I go, I got to, you know, I got to get, I sold at that point.
And I put in a stop and sold it at 40, 43.
So in the yearly high, it's 55 and an eighth, and it's down now to 23.
Right, iOmega's been dropping like a rock for a good week or two weeks.
And the Motley Fool boards were full of howls of pain.
Show us iOmega here.
You know, this has been a very severe correction for iOmega.
The real hype, Motley Fool hype was right around here.
It was a good horse, but it was just a horse, and you had to get off it.
And there are other horses out there.
Try to pick a horse that's not a sprinter.
Try to pick one that's going to be around.
The stock got ahead of itself, as often will happen with great growth companies, we think.
And so somebody could have bought the stock at 55 and seen his investment melt down to
about 21 today.
Now, at the same time, many other people bought at 2 and 5 and 10 and 15 and 20 and may have
sold at 48, for all we know.
In Japan, they had a name for this.
They called them the Shinjin-ri, and it literally meant new human being.
They were the 20-something-year-old people who had had no experience in the market, were
put in charge of all the investing, and they thought that nothing would ever go wrong.
The Japanese stock market, which had been the wonder of the 80s, crashed in 1989, and
it's never recovered.
Even today, the Japanese market is just over half what it once was.
And once euphoric, Japanese investors now feel burned.
I find it somewhat ironic that here we are, seven years after that bubble burst, the Japanese
are still trying to pick up the pieces.
At that moment in time, we are doing many of the very same things.
People are buying stocks for one reason.
They are going up.
I have two kids I want to put through college, and I figure this is the best way I'm going
to be able to double my money.
Necessity is the mother of invention, so I've heard.
And I have a wife and four kids.
I'm a policeman in the city here, and I figured I needed to make some more money.
Why not just put it in the bank?
Well, the bank only pays you 3%, and it makes you feel like you're not gaining ground, and
the stock market is faster.
People have confused need with certainty.
We need this to work.
It seems like it will, therefore it will.
It's a little bit like going to the track and betting on number three and saying, I
really need this horse to come in for me.
Well, just because you need it to come in doesn't mean that it will.
It's funny that people are motivated by anxiety to take a risk.
You'd think that anxiety would make them risk averse.
Let's go.
Time to go home.
Sharon eventually sold Microsoft.
The next time we caught up with her, she and Russ had put their life savings into two tiny
volatile technology stocks.
Why?
Because we're working very hard and not furthering ourselves.
It's too slow.
We have got to do something aggressive.
It is scary, but at this point she just wants to, Sharon, well actually she took a little
more and just invested recently that was very conservative and she kind of went and did
something that I think we'll make out on as long as the market doesn't crash.
Right now just about everything is in there.
What did she do?
She went and invested in a stock that she was told was going to do very well.
To tell you the truth, I don't even know the name of it.
I know the call letters are A-M-L-N. It's supposed to double by August.
Do you worry about your future financially?
Oh, yeah.
All the time.
That's just why we're trying to do something.
That's just what I'm saying.
There's really nothing to depend on except yourself, so we worry about it.
The money that people used to put in the stock market was money that they hoped to get rich
on or get play with or maybe finance a trip to Europe or something.
What's going on today is blood money with jobs less secure and with really the wonderful
corporate pension fund that promised you a pension of X percent of your final salary
when you retired with that no longer as important and taking care of a smaller and smaller proportion.
This is blood money that's in there.
I think that what has been happening is a kind of fear approaching a panic that's spreading
through the baby boom generation, which has suddenly discovered that it will have to provide
for its own retirement.
If retirement is a bridge to be crossed when we get there, then let us begin.
Have you thought about how much you're going to need to retire?
Sure.
I have.
I think I'm probably going to need anywhere between a million and a million and a half
dollars to retire.
That sounds like a lot of money.
It is a lot of money.
Are you there?
No.
No, I'm not there.
All these particularly late baby boomers, people in their late 40s and 50s, they've been spending
their whole life.
They've not been saving.
And now they see their retirement not that far off, 10, 15 years.
Hey, people don't believe there's going to be any social security.
There will be something called social security, but it's not something you're going to want
to live on.
The stock market was not a factor of my parents' lives.
My father was a member of the union.
He had a pension.
He retired at 60 years old.
And my mother still lives on the survivor's benefit of that pension.
And that's never been a possibility for you.
It was not the road I chose.
I'm counting on the market for my retirement.
Micron technology up a quarter, one and a quarter.
With so much riding on the market, we seem to have forgotten what a fragile and human
instrument it actually is.
How much its movements depend on how we feel about it.
Right now, at a moment when we're counting on the market as never before, we feel it
will always take care of us.
But will it?
In nature, in life, in everything, there are cycles.
There's no such thing as the elevator that only goes up, which is what the stock market
is in people's minds now.
The risk is that if that process gets started again and we only traverse back to what the
average level of expensiveness, never mind cheap, like we were in 1982 in this process
this bull market started, but if we only get to average, that would mean a decline in the
stock market of 50 percent.
In other words, just to revert to its historic norm, the market would have to lose some 3,000
points.
What will happen is we will simply get too high.
There won't be enough new money coming in to keep the market going up.
Losses will start and losses will beget losses and then people will be people and they'll
sell.
595s, 500 of the parts.
595s, 500 of the parts.
Buy me five ain't it.
Buy me five ain't it.
I want to bring in these shorts.
I want to bring in the gezooks, the outback, the impossible stuff to buy, and HMTT.
The real trap for any investor in a market that's been as volatile as this one where
rumors sweep through the internet is believing that you can get in early and you can get
out early and you can beat the consequences.
And of course if everyone believes that it means no one gets out early.
I want to know the 10 Boeing.
It's absolutely right, okay?
It may be true that over time the stock market will outperform other forms of investment.
But it is also true that you can take 10, 15, 20 year slices out of that long track
record and find very disappointing returns.
For example, if you'd invested at the height of the 1960s go-go market in 1968, you didn't
recoup your investment until 1982.
If those happened to be your retirement years, you were in real trouble.
There is no immunization of the American stock market that keeps us from ever having a long,
dull, grinding bear market.
It could happen again.
One of the things that I find myself worrying about is what would happen if we had a sustained
bear market after a lot of the baby boomers had retired.
They were all past 59.
They were beginning to draw from these different retirement plans that were invested in the
stock market.
And yet suddenly their stocks were under water.
On paper their investments were down 30, 40, 50 percent.
What would they do?
Still interested?
Frontline Online at www.pbs.org goes beyond the broadcast.
Ask top professionals your own investment questions.
Get their wisdom on whether or when a bear market is coming.
And check out strategies for young investors and lots more at Frontline Online at www.pbs.org.
And next time on Frontline, if it bleeds, it leads.
But what happens when the news cameras go away?
It's supposed to be real life, what we see on the news, but it seems increasingly unreal
to me.
From Ross McElwee, the creator of Sherman's March, comes an intimate encounter with God,
fate and the six o'clock news.
Watch Frontline.
Now your letters.
Secret Daughter, producer June Cross's personal story of her mixed race upbringing, prompted
hundreds of you to respond.
Dear Frontline, for my wife and I, the racial gap in this country was narrowed for those
two hours.
I believe this program transcended race.
It was about sample.
June was able to show each person's humanity, frailties and strength of character.
While watching Secret Daughter, I found myself getting angry for June Cross.
June Cross could never have been successful if her mother did not do what she did.
This could have been one of the media's finest hours, responsibly exposing the pain of racism
from both sides.
But many of you had an opinion about June's mother Norma's decision to give her to a black
family to be raised.
Dear Frontline, I wonder if June Cross's saga is more about failure of a mother to meet
her responsibilities than race.
My wife and I have been married 27 years, bore and raised a 26-year-old biracial son.
Our view was the choice of mates was our personal business and society could take it or leave
it.
Can't understand the importance which June's mother placed on the acceptance of friends.
Dear Frontline, I wanted very much not to like Norma.
It would be very clear-cut to say that she abandoned June for her self-interest.
However, she obviously was determined to remain in her daughter's life and not to abandon
her.
This is a celebration of the fact that we are human.
We make mistakes and don't always understand why things happen.
Bravo, June.
Thanks for sharing your story.
There are dozens more fascinating responses at Frontline's website.
And don't forget to write.
Thank you very much.
Thank you very much.
Thank you very much.
This is PBS.