From 1925 to 1929 the market went up and up and up. Investors who were of the cautious school became speculators. Even the shoe shine boys had stock tips. When folks gathered the stock market was the number one topic of conversation. Day trading became fashionable.

Margins were 10%. That meant if you had $100 you could buy $1,000 of stock. If it went down you would have to come up with the loss immediately or the broker would sell out your position and you still had to pay the loss. As the market rose it didn’t happen very often and everyone became a stock genius. Reminds me of 2000.

Any fool could buy something and if his $1000 stock went up $10 he could sell out for a 100% profit (less commission). It is easy to see why speculation became rampant.

Today the margin requirement is 50% which has curtailed speculation, but not eliminated it. It takes a ton of money to play that game today. BUT today we have hedge funds that have literally hundreds of millions of dollars and do a huge amount of day trading on margin. There are many good and “conservative” hedge funds and there are also many that are not

What no one seems to have grasped is that hedge funds borrow against (leverage) their portfolios so they can trade bigger numbers. Banks will loan them additional funds and the amount is determined by the quality and type of trading they are doing. Think about this: a hedge fund borrows an amount equal to 50% of their portfolio and than trades on a 50% margin. The amount of potential loss can be staggering.

The little investor does not seem to be trading in and out yet a recent study finds a huge change in investor attitude. During the 1950s investors held stocks for an average of seven (7) years. Today those same people have become traders who hold stocks an average of eleven (11) months. This figure may or may not include mutual funds that make portfolio changes many times during the year.

That doesn’t mean we are facing another 1929 just because there is a rapid turnover in stocks.

Most of the mutual fund managers today haven’t a clue on how to handle customers’ funds if another bear market takes hold. That is easily proven by the results from 2000 to 2003. They have not learned anything.

No, this is not 1929 and it won’t be caused by excessive margin trading of little investors, but we do have a huge group of “amateur” mutual fund managers holding trillions of dollars which they do not know how to protect.

It could be worse.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

Copyright 2007 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"