Riding The Wild Bull

By Stephen Koepp

Katherine Bonner, stock-market player, is not afraid of those brainy, brawny institutional investors who routinely turn Wall Street upside down with their 100,000-share transactions. Nor is she intimidated by those high-tech program traders who can send the Dow Jones averages reeling with their computer- powered stampedes. In fact, Bonner is not only making what she modestly calls a "good living" in the market but is earning enough to help out her grandchildren and great-grandchildren too. A highly active investor, Bonner, an 80-year-old Houstonian, has built up a handsome portfolio by studying financial news assiduously, visiting her discount broker every morning and afternoon to keep tabs on the market and making her picks ahead of the professional pack. "I am not all that smart, I've just got some common sense," says Bonner, a former artist and pharmacist. Institutional investors take note: right now Bonner likes oil and pharmaceutical stocks.

Bonner is among millions of individual Americans who are making a private killing in the wild bull market of the 1980s, which will turn five years old on Aug. 13. They have come back with growing confidence to the stock market they fled during the bearish 1970s. "The longer the bull market goes on, the more believers there are," says Charles Neuhaus, a broker for Houston's Underwood, Neuhaus. During the first half of this decade, the number of Americans who own shares in individual companies or stock-market mutual funds increased from 30.2 million to more than 47 million, according to a study by the New York Stock Exchange. While half those shareholders own stock in only one company or fund, the other 23 million or so include many investors who have turned stock picking into a serious pursuit.

/ These individuals are reaping lucrative profits during an era in which the big institutional players would seem to have all the advantages: research, resources and speed. While individuals control nearly two-thirds of all stocks, or about $2 trillion worth, institutional investors turn over the remaining third at such a rapid pace that they account for 80% of all stock transactions. Private investors are much more likely to sit tight with chosen stocks. But the more active individuals are finding their own tools and tricks. They now cut the cost of commissions by ordering through discount brokers, follow obscure companies through a growing number of newsletters, keep their holdings in convenient cash-management accounts and even get stock quotations through hand-held radio receivers.

The biggest boon, however, is the seemingly relentless bullishness of the market. The remarkable run of the Dow Jones industrial average began in August 1982 at the lowly level of 776.92. The Dow, having more than tripled in value since then, is now so high that investors sometimes get a kind of queasy altitude sickness that requires a retreat. That is what happened this spring, when a sizable sell-off sent the Dow tumbling 190 points from a record 2405.54 on April 6 to a low of 2215.87 on May 20. But then the Dow began a summer surge to new heights. Last Friday the Dow closed over 2500 for the first time ever, ending the day at 2510.04, up 54.05 points for the week. Since the beginning of the year the Dow has risen fully 614.09 points, or more than 30%, a bounteous half-year return by any standard. One reason for the latest rally is a huge improvement in company profits, thanks to corporate streamlining and a declining U.S. dollar, which has boosted export sales.

Yet the volatility of the market is inspiring a mixture of excitement and fear, since the Dow's stratospheric level gives it a tendency to sweep up and down from time to time by 50 points or more a day. When individuals reap an overnight windfall, they can become manic and even a little careless about where to put the money next. "Clients are calling about speculative stocks that they've heard about at cocktail parties over the weekend. I'm worried about this," says Jerry Tisserand, a broker for Thomson McKinnon Securities at a branch in Evansville, Ind. At the same time, many investors realize that a bear market could hit at any moment. Some become spooked by sudden downdrafts and sell too soon. "It's hard to keep people in the volatile blue chips. They're getting whipsawed," says Richard Geier, a broker for Reynolds DeWitt Securities in Cincinnati.

The disconcerting gyrations of the mainstream stocks, which are heavily played by institutional investors, have inspired many private investors to march to a different ticker. They prefer to find lesser-known companies whose stocks are undervalued or potential earnings overlooked. But to arrive at a hot property before Wall Street professionals is a feat that requires lots of homework, constant vigilance and a cool head. Says Investor Jeffrey Solomon, a hardware-sales representative based in Great Neck, N.Y., who carries a hand- held stock monitor at all times and studies charts and newsletters every night: "The astute investor can beat money managers. They are human. They panic, become euphoric or get emotional just like all of us." At 32, Solomon has accumulated a five-figure profit pile.

Nearly every investor develops a personal method or specialty. Investor Tedd Determan of Chicago, who puts most of his $1.4 million portfolio into small, fast-growing stocks, often invests in companies whose products he appreciates as a consumer. A confessed "popcorn freak," he savored the brand made by Golden Valley Microwave Foods, and so he bought the company's stock. It has gone up nearly 70% in value during the past year. In another instance, Determan was so impressed with the service at Jiffy Lube International, a franchised auto-service chain, that he bought 3,000 shares at 9 1/2. Current price: 15 5/8.

Determan studies annual reports and other documents before taking the plunge, but if he has any remaining questions, he simply calls the company president. That opportunity, he points out, is one of the lesser-noted benefits of investing in small ventures. When he became concerned about an earnings downturn at Innovative Software, Determan called the chief financial officer there, who reassured the investor that the profit slump was "just a glitch." So Determan held on to the stock, which proceeded to zoom from about 10 last November to 22 now, even after a 3-for-2 split.

In line with Determan's principle, many private investors like to put their money into ventures they understand or industries in which they have unusual chances to spot a breakthrough product. Says Hugo Quackenbush, senior vice president of the Charles Schwab discount-brokerage firm: "Airline pilots, for example, may know some kind of gadget that is being made by a company that may escape the attention of the big guys on Wall Street."

Some investors succeed by shunning glamour. Russell Faucett, a Los Angeles financial adviser who spends about half his time managing his personal portfolio, looks for solid, small Rust Belt companies with lackluster earnings and low profiles. Says he: "Well, my stocks are kind of boring actually, and of course they are of no interest to the big investment firms, because the brokers can't tell a good story about them to their clients."

The stock-picking bug has even bitten people who would ordinarily take no pleasure in studying price-earnings ratios and balance sheets. "It's so simple, it's insane. If you do this carefully, it's like picking money off trees," declares Michael Petryni, a Los Angeles screenwriter, sounding more like a TV pitchman. But behind the scenes, Petryni spends at least two hours a day studying financial papers like Investor's Daily and following stock quotes using the same computer terminal on which he writes his scripts.

Many investors are surprisingly daring at an early stage. Fairfax Randall, a Houston homemaker and sometime interior decorator, boosted her portfolio from $250,000 to $2 million in just three years by leveraging, or borrowing money to increase her stock-market wagers. But she ventured naively into risky stock options and lost $1.5 million during the 1981-82 recession. Then, through cautious decisions and hard work, she built her portfolio back to $2 million. Says she: "The stock market is my absolute love. I don't buy pretty clothes, and I never spend much money on myself. I put it all in the market."

Not everyone is willing to risk such setbacks, especially if the savings in question are earmarked for retirement or education. J.H. Freeman, a 70-year- old former financial manager of a Houston law firm, is primarily interested in steady-dividend income rather than a zooming but precarious stock price. Thus he prefers companies with reliable profits, like power utilities. Though his taste is conservative, Freeman has doubled the value of his portfolio in five years.

For all the variety of their methods, private investors have many common guidelines. For example, many small investors avoid buying individual foreign stocks, since they may have trouble getting timely information about the securities. Small-time investors generally shun stock options, futures and other risky instruments unless they have carefully constructed a way to use them as a hedge against losses in their common-stock portfolio. Finally, they frequently establish predetermined selling points at which they will dump a stock to cut their losses or capture their gains. Says Melissa Lamb, 28, a Manhattan real-estate broker who is learning the hard way: "I have picked some good ones, but I just wait and wait in the hope of a bigger profit, until all the profit evaporates."

The desire of so many investors to make their own decisions has become a boon for discount stock brokerages. These firms charge smaller commissions than full-service investment firms because, unlike the traditional houses, the discounters provide no advice or portfolio management. For example, on a sale of 100 shares of a $60 stock, a discounter's commission would be about $50, in contrast to nearly $100 at a full-service brokerage. As a result, the percentage of retail stock transactions placed with discounters has increased from 8% in 1982 to an estimated 22% this year. Most successful is San Francisco-based Charles Schwab, the largest U.S. discounter, whose revenues have gone up from $42.7 million in 1981 to $308.3 million in 1986. Schwab notes that the typical size of the accounts held by its 1.5 million customers is between $50,000 and $100,000.

Both discounters and full-service brokerages have produced a wealth of tools to help individual investors keep up with the technical capabilities of the professionals. Schwab sells its customers a personal-computer program called The Equalizer (price: $99.95), which enables an investor to keep track of a portfolio, place an order and call up stock-price quotes, research reports and financial news. Telemet America, one of the several firms offering hand-held devices for monitoring stock quotes, now serves 16 cities and 10,000 customers, 90% of whom are private investors.

For those who want to play the market but lack the time or inclination to gamble on specific stocks, mutual funds have been the answer. Stock funds grew by $41.7 billion during 1986, a 33.4% increase, to reach total assets of $166.4 billion. But the number of stock funds, now in the hundreds, has mushroomed so fast that selecting one can be almost as tricky as picking individual issues. Even so, it is hard to go wrong in such a strong bull market. During the first half of the year, the average stock fund rose some 22%.

All told, the growth of individual participation in the market should come as a welcome trend for corporate America. The tendency of private investors to put their money on the line for relatively long periods of time is a desirable counterweight to the fickleness of Wall Street money managers, whose what- have-you-done-for-me-lately attitude has long bedeviled corporate managers. Average investors tend to be more patient in waiting for results. Fortunately, their patience is not exactly being put to a test these days.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: RECORD LEAP

Dow Jones industrials weekly closings

DESCRIPTION: Dow Jones Industrials, January 1986 to July 17, 1987. Color illustration of man riding bull while bear watches.

With reporting by Deborah Fowler/Houston and Edwin M. Reingold/Los Angeles