Goodbye Wall Street, hello Omaha

Kiplinger's Personal Finance Magazine, Oct, 1998 by Steven T. Goldberg

Ron sundermann is taking his shower, CNBC blaring so he can listen to market chatter. "The guy on the TV says the only stock he likes right now is Archer Daniels Midland. We have an ADM factory right here in Cedar Rapids, and the Andreas boys [the chairman and president of the firm] grew up near here. So I literally jump out of the shower and, dripping wet, run to the computer, fire it up and buy shares from my Internet broker."

He isn't buying for the long haul. Sundermann has noticed that stocks tend to spike after favorable mentions on CNBC or in other financial media. After a bit, enthusiasm usually wanes and the stock drifts down. So Sundermann puts a tight stop-loss under his ADM shares, which will trigger their sale if the price drops to a certain point. As the price rises, he moves the stop-loss up. Sure enough, he sells his ADM shares a few days later, netting about $3 per share.

Sundermann, an Iowa insurance agent, is a foot soldier in a revolution that is profoundly altering the investment landscape. To Sundermann and his fellow rebels, Wall Street and its legions of analysts and brokers are largely irrelevant. Emboldened by online investment newsgroups, investors are abandoning full-service stockbrokers and mutual funds--or are using them less--in favor of buying and selling stocks on the Internet. Instead of paying $100, $200 or more in commissions, they're executing trades for $12, $7.95 and even $5.

The brokerages of the Internet Age are more likely to be headquartered in Omaha or Austin than in lower Manhattan. Thanks to fierce competition among scores of online brokers, many commissions are less than half what they were just a year ago. Abandoning full-service brokers means picking your own stocks. It's no accident that the growth of online trading has coincided with an enormous increase in the quality and quantity of investment information on the Internet.

Until 1993 the Internet was a mystery even to most personal-computer owners. The first Internet trading didn't occur until mid 1994. Last year, according to Piper Jaffray electronic-commerce analyst Timothy Klein, 17% of all trades by individual investors took place online; this year, he says, almost one-third will. Klein projects that revenues from online trading will balloon at a 50% annual rate, to $2.2 billion by 2001. Already, some online brokerages are among the few Internet ventures actually turning profits.

Dirt-cheap commissions save many investors money and allow some to execute strategies that were once impossible. Sundermann's ADM profit would have vanished under full-service commissions. Instead, his successful trade encouraged him to try it again. Over the past several months, he has quickly bought and sold Texas Utilities, American Express, Southland, GKN Sinter Metals and Sterling Commerce, to name just a few. He figures his annualized gain is 64%. Most of Sundermann's portfolio resides in mutual funds and buy-and-hold stocks. But he's done much better, at least so far, with what he calls his "play money."

NO MORE `LITTLE INVESTORS'

The Internet is leveling the playing field in more ways than one. Not only can individuals make trades at the same price as institutional traders, they can also mine much of the lode of investment information that until now was the sole province of the big boys. The result is a sort of democratization of investing--at least for those who have the savvy and time to find the nuggets amid the vast quantifies of information (and misinformation) on the Internet.

Let's research stocks: Head to your computer and screen stocks for any of a variety of criteria (such as low price-earnings or price-sales ratios, or rapid earnings growth) by going to, say, www.marketguide.com and downloading StockQuest. Or if you prefer to start with experts' picks, visit www.lehman.com and find out what stocks full-service broker Lehman Brothers is recommending to its clients. Once you narrow your search to a couple of stocks, trek to www.yahoo.com or any of a number of other sites for the latest news about them. There, you can examine the companies' fundamentals, study their income statements and balance sheets, and look at charts showing their stocks' past performance.

Next, visit www.zacks.com to obtain brokerage analysts' consensus earnings estimates and to find out whether analysts recommend the stocks. Complete Securities and Exchange Commission filings on every U.S. public company are at www.sec.gov. Moreover, this entire research process can be done any time of the day or night, wherever you have a computer--and none of it costs a nickel. (For a list of some of the better Internet investing sites, see "Where to Mine the Data," on page 87.) And you can keep track of your portfolio for free through personal-finance sites such as www.kiplinger.com.

Because online brokerages want to keep you at their Web site, in the hope that you'll place a trade with them, many offer these tools and information themselves. Some online brokers also offer free company reports by Argus, Hoover's and Standard & Poor's--information that might cost money elsewhere on the Web.