Market Swings Scare Small Players

ONE casualty of all the discussion earlier this week of a possible new stock market collapse may well be the long-awaited and much-sought return of the individual investor, according to market experts. Individual investors were scared away following the October 1987 market crash. Now, Wall Street may have to wait just a little longer for droves of individuals to feel comfortable again about committing their money to the market.

Because of last week's sharp sell-off, efforts have probably been set back ``for six months to a year'' to induce individual investors back to the market, says Thomas O'Hara, chairman of the National Association of Investors Corporation, a national organization comprised of individual investors. Indeed, most individuals who invest in stocks today do so by buying into a mutual fund, rather than trading directly through a broker.

Granted, the investment community breathed a collective sigh of relief earlier this week when on Monday, the market closed up 88.12 points, at 2,657.38. That gain came after last Friday's loss of 190.58 points in a late afternoon of tumultuous trading, following reports of the collapse of a buyout effort for UAL Inc., parent corporation of United Airlines, by a management-pilot group.

``Look, most smaller investors never came back after October 1987,'' says Larry Wachtel, senior vice president for research at Prudential-Bache Securities, Inc. What happened during the past few days, Mr. Wachtel says, will probably just reinforce the skittishness of the small investor.

Today's financial-market trading, experts note, tends to center around institutional money managers. These are traders who deal with the enormous sums found in pension funds, mutual funds, and corporate accounts. Their buying and selling typically represents 70 to 75 percent of all activity in a normal trading day.

Unlike smaller individual investors, who tend to buy or sell early in the trading day, money managers tend to wait until late in the afternoon. Often their computers are programmed to undertake specific commands - such as an order to sell - when certain conditions occur on the broader market.

``Smaller investors should be screaming to Congress about what has happened to the stock market,'' says Avner Arbel, a professor of finance at Cornell University and co-author of a study of the 1987 downturn, ``Crash: Ten Days In October. Will It Strike Again?'' A consultant to the Brady Commission, the presidential panel tasked with determining the causes of the 1987 downturn, Professor Arbel believes that the market has become the tool of speculators.

``The market has become a casino where there is high volatility, with big winners and losers. The United States can't afford to live with such a monster.''

The loss of the small investor could present significant long-range dangers to the US, Arbel argues. ``Without the individual investor we are going to lose our entrepreneurial edge. Small investors have provided most of the capital and support for growth companies, the IBMs and Apple computer companies at the beginning of their climb to success.''

``Institutional money managers,'' by contrast, Arbel says, ``like safety, dividends, and prudence. They tend to avoid the more risky, but promising, companies.''

Getting the individual investor back will not be easy, experts note.

``The market rose 1,000 points from the last crash in 1987 to what happened Friday, Oct. 13,'' says Wachtel of PruBache. ``If something like that doesn't get him back, I don't know what will.''

Given the use of high-speed computer programming, plus the clout of institutional funds, with their billions of dollars to invest, individual investors have learned that ``it's not a level playing field out there,'' says James L. Fraser, of Fraser Management Associates in Burlington, Vt. Fraser Associates manages over $100 million in assets, most in individual portfolios as well as smaller pension plans.

Mr. Fraser, for his part, urges smaller investors to stay in the market despite the day-to-day gyrations of the Dow Jones industrial average and other market indicators. ``Investors should stay in the market for the long haul.

``Just don't expose yourself to areas [of investment] that seem especially hot,'' that is, look too good, Fraser adds. Most of all, says Fraser, ``forget the daily newspaper headlines'' about the condition of the market.