Episode #6 - The Stock Market, an Investor's Guide: The Market Goes Mainstream
Announcer: Welcome to The Money Clip podcast series from The Vault, Scotiabank’s online guide to helping Canadians get ahead financially. Listen in to gain a deeper understanding of your personal finances and find out how a few small changes to the way you manage your money can make a big difference.Michael Seaton: Thank you for joining us on our second Money Clip podcast series from Scotiabank. I’m Michael Seaton, Editor of The Vault program, which provides Canadians with a deeper understanding of personal finance and money related matters. With us today is Fred Ketchen, Director of Stock Trading for ScotiaMcLeod, who is here to discuss the ins and outs of the stock market. This is the final of three in this series, and in this segment, we’ll look at the stock market in terms of its larger role in society and critical points in its history. Before we begin, we would love to hear from you, our listeners. Information on how to reach us with questions and comments will be provided at the end of the show. So welcome back again, Fred, and thanks for speaking with us today. There’s a saying that everything we do affects our money, and our money affects everything we do. Given the ups and downs in the stock market that are often big news; when did the stock market go so mainstream and big time?
Fred Ketchen: In my opinion, it took a long time for the stock markets to mature. I mean, you know, they started in coffee houses for goodness sake, as we mentioned here a little while ago. And they’ve progressed from coffee houses to all of a sudden big edifices known as stock exchange towers and stock exchange buildings, and so on, and great advances in technology. But in my experience, I would think as you got into the late1950s through 1960, into big changes in technology in the 1970s, the stock market really became more mainstream. As our radio, television, newspapers, magazines decided that money was important, it was a natural thing to have happen. All of a sudden, you find a huge influx of new investors and greater interest in our stock markets, and I think stock markets—the exchanges themselves—have dealt very, very effectively with that by upgrading their systems, their information, and what they pass out to the public. And so, even in some schools now, for goodness sake, there are opportunities for students to learn what it is—the stock market—and why it’s there, how they can participate, what the advantages are. So I think that, beginning in the late 1950s. And that progress, in my opinion, will continue.
Michael Seaton: Excellent. Maybe some students in schools will listen to these podcasts and get a little out of them on the stock market. What impact, moving along, do politics and world events have on the Canadian stock market? For example, how did our domestic markets react to 9/11? And what about when we look back on things in history like Y2K, the oil crisis in the ‘70s, and even the assassination of JFK in the ‘60s? How did events like these affect the markets?
Fred Ketchen: Any one of those, or all of them, all have a significant effect upon stock markets, and when I say that, obviously they’re affecting prices of stocks. Stock market is a very emotional animal and when events such as you have mentioned occur they are very emotional events. And trying to intertwine the two, they do work together, because as the emotion declines in many people around the world, so does the value of our stock market. I can understand why, because there is a certain amount of fear that all of a sudden appears when you see an event like 9/11, when you go through this oil crisis that we have experienced. When—I remember very well the day that John Kennedy was assassinated. You know, markets have to close down for that period of time to allow people to bring themselves back together. But generally, the first reaction is a very negative one, but eventually minds, people and their reactions, overcome that negative attitude and we know that life will go on, and things do calm down.
Michael Seaton: Great. On Black Monday back in the 1980s—speaking of a point in time when things were looking down—how did that event protect us better today, and what did we learn from that downturn in the market.
Fred Ketchen: Well I think that—I remember that experience extremely well—and as a matter of fact, as I recall now, the Toronto Stock Exchange’s index, on that particular one day was down by about eleven-and-a-half percent, the Dow Jones in New York declined twice that much, all in one session, and for good reason. I mean, there was ample reason why that might have happened. The attitudes, and the feelings, and the interest rate environment, and so on, all had a part to play in that. But I think that what happened since that time is that they now have certain curbs that are put on. After a market declines to a considerable degree, stock exchanges bring in trading curbs. They stop trading, and they’ll stop trading for an hour, and the idea is that within that hour, people can get their minds together, their thoughts together, get their emotions under control, and, hopefully, calm things down. In the event that after it opens, after that one hour of closure, and it continues, well you’ll go through another five hundred-point decline or a percentage decline in the index and they’ll close it again. And, again, that is only there to allow people to calm themselves down, because you know very well that one of the largest gains that we had in our market was two days after that huge decline that we saw back in that period. So it’s a calming influence, and I think we can deal with it much better now than we did then. Besides, there’s much more communication available now than there was at that time, even though it was not that long ago.
Michael Seaton: So speaking of communications and the recent downturn and upturn in the markets and I’m talking in the past five-to-ten years; how do we tell the difference between a bull market and a bear market, and how do we know when we’re in one or the other?
Fred Ketchen: Well, a bull market is a market in which prices are rising. Look at a bull if you want to apply that terminology to a person. A bull is a person who expects the market or the price of a particular security will rise. And when you get that kind of an environment in the stock market, then I guess you’d have to say we’re in a bull market. On the other hand, if you have bulls, you must also have bears. And so a bear market is a market in which prices, of course, are declining. A bear is a person who expects the market or the price of the security is going to lose, is going to go down. So that determines the bull or the bear market. It just depends upon degrees, of course; how much of one, how much of the other.
Michael Seaton: Glass half empty or half full.
Fred Ketchen: That is right.
Michael Seaton: The Dot Com Crash in 2000, 2001, was huge news, and it affected a lot of people. Why did investors fall blindly in love with tech stocks back then, and was that a stock market bubble? And how do you identify something as a bubble when you’re in it?
Fred Ketchen: Well of course, you know what a bubble is. It’s a great big round thing that all you have to do is touch it or prick it with a pin and then it bursts. And that’s what we talk about, a “stock market bubble.” Because it can build itself up to a huge degree and then all of a sudden, somebody just pinches the edge of it, and it just blows up on you. Well that’s what we have seen, obviously, with the Dot Com bubble, which takes you back into that period, as you mentioned, 2000, 2001. People got all excited about major, major advances in technology. Unfortunately, I still own some of the shares that I bought during that tech bubble, and I’m waiting—and I’ll probably wait for another hundred years—before they get back to the price that it was. But remember the world was changing. They were digging up the streets in the major cities and they were putting fibre optic cable up them all so we could communicate so much better, and the technology was overtaking us. And I think that what happened is that technology was advancing, but it was overtaking the logical minds of many, many people who thought that this was going to advance the world to a situation where we could never, ever imagine. And in some respects, I suppose, it probably did. But nevertheless, it wasn’t sustainable. And now all that fibre optic cable that is up the major streets in your city now, a large part of it isn’t used. So, you know, whether it be Nortel, whether it be the fibre optic JDS Uniphase, a whole lot of companies like that, people bought the stock because they thought there was absolutely no end to the riches. Well, hopes are one thing, reality is another, and reality presented a much different picture, and that’s why that Dot Com bubble burst, and those people who were left holding some of those things at those high prices are still anguished about it.
Michael Seaton: It's reassuring to know that—for people like myself and our listeners—that you were caught up in a little bit of that yourself, too. What happened after the stock market tech bubble burst, and when did the market start to bounce back?
Fred Ketchen: You know, economies have a certain vitality to them, markets have a certain vitality to them; they don't stay down forever. There is always recovery, and it took—certainly the tech sector is still in recovery, if you want to look at it that way, from that burst bubble. But the whole market suffered back at that time and markets do fight their way back, and it took five years as a matter-of-fact, for our market here in Canada to fight its way back to a level where it was before that bubble burst. And I think that when you look back at history, I don't care what kind of an event it is, whether it's a cultural event, whether it's a climatic event, whether it's hurricanes, floods, you know, whatever it may be, our economy, our markets have a way of recovering and, in my opinion, they always will, it's just the length of time that it takes. So, once all the emotion is out of the way, once we get back down to practicality, once we get down to the land of reality again, then things start to climb back up again, and I think that's what we have seen. Hopefully we don't have to face another one of those things before a long, long time passes.
Michael Seaton: Let's hope not.
Fred Ketchen: I hope.
Michael Seaton: Now looking at technology in general and the—whether you want to call it the global village, or the interconnectedness now of the world—how has the growth of technology and its implementation helped investors?
Fred Ketchen: I think that technology has helped investors to the extent that far more information is available and accessible today than has ever been accessible and available before. You can find out so much more information about companies that are there and available to invest in, if you wanted to do that. And the best part is that you can do it more quickly. So that when an event takes place you don't have to wait like three weeks to get some mail, you can get it in, like, about three minutes if you know how to get into an internet site and ask the question or pursue that line of information, that will provide you with the answers that you need to the questions or the doubts that you have. So I think technology has been very, very prominent in repairing the availability that we didn't have before. It is available, it’s accurate, because it's there, it's put out by the people who are involved, and I think it has made a huge difference. It has also speeded up the way that we can do our own transactions, for goodness sake, in the market, and I think that's important as well. Rather than the old days when I remember, you'd phone up in the morning and ask to buy a stock and you might know by the morning of the next day whether you'd bought it or not. Well it's instantaneous now.
Michael Seaton: All right. Final question in this series and to wrap up the podcast: the rise of computers has made it easy for the individual or retail investor to trade like a pro. Has this advance made the stock markets more volatile and less efficient, or as these barriers to access have been removed, is it the case now that more investors means the markets are better at determining real value? What's your view on this?
Fred Ketchen: Well, I think more volatile, yes. I think the more people that you have entering the market, there are levels of knowledge that are far, far different. People are doing it for different reasons, and all of those different reasons add to the amount of volatility because of the emotions that are different from one person to another person. Less efficient? I'm not certain that I would use that word. I think that when you look at the efficiency of markets you want to make sure that this market has a certain amount of depth to it. And the more depth you have to a market, in a way, it does diminish the amount of volatility. The more people who enter our markets, the broader those markets become, the greater the size of the bids, the more people who want to buy. For those people who want to sell, the greater the size of the offering. And so, when large buyers and sellers come in, there is less chance that their orders and the pressure of their orders is going to move the market more, perhaps, than it might have if all these other people hadn't been in the market on either the bid or the offering, depending on where this big order is coming from. So that means markets, therefore, as I said, have greater depth. And I think greater depth to the market cuts down on volatility, and, in the long run, will serve all of us better because the more efficient our markets are, the better off we are when we go to trade in them. Use them as a wise individual, understand the benefits and the drawbacks, but I relish in the growth that we have seen because, in my opinion, we have a much more efficient market now than we had, say, twenty years ago.
Michael Seaton: Well that will conclude our series on the stock market. Fred, I want to thank you very much for being here. We really appreciate you sharing your knowledge with our listeners. It's actually been really fun turning the tables on you. For those of you out there that don't know, Fred is the host of another Scotiabank podcast series called Find The Money that can be found at scotiabank.com. Thanks again to our listeners for joining us on The Money Clip podcast series from The Vault at Scotiabank. And we hope you will join us next time.
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