“Flash Crash” … “Dow Plunges Again” … “Computers Take Over”

With such headlines awash in our media, it is no wonder average investors are becoming wary and seeking alternative places for their money. In fact, the LA Times published a story titled “Betting the Farm… on the Farm” on September 20^th 2010 that  describes how more private investors are pulling funds out of the stock market and seeking distressed real estate to grow their nest eggs. As James Yunik, a real estate broker in Madison, Wis., recently said, “It’s higher risk to buy homes in this market, but for those with cash in hand, it’s becoming more appealing than the stock market.”

Wall Street (NYSE and NASDAQ) has more than $11.5 trillion in combined market capitalization value, trading upwards of 4 billion shares every day. With those kinds of numbers, no wonder our government has recently run up the national debit to bail it out.

However, in the past two years there has been increasing volatility in the public exchanges and decreasing public opinion of Wall Street. Just remember May 6, 2010, when the Dow took its biggest tumble since the crash of 1987 before bouncing back and closing the day down 3.2 percent. “About $700 billion was erased from U.S. equity markets during an eight-minute span after the NYSE took actions to slow trading,” according to Bloomberg Businessweek.  

Accenture Plc (ACN) went from more than $40 per share at 2:47 p.m. to 1 cent at 2:48 p.m. — obliterating all but a fraction of the company’s value before it spiked back up to normal levels before the end of day. If you happened to own this stock and checked it mid-day, you might have tossed your lunch due to the incredible losses mounting in your account.

It’s no wonder the average investor is getting spooked by Wall Street and seeking investment opportunities closer to home. This kind of financial stress is no fun for anyone. Yet, if you have ever invested in stocks, you can relate. To make matters worse, no sound explanation has been given for the May 6 market plunge. There were no major adverse geo-political events that day to trigger such a drop. Many theorize that it was the computer trading robots of the big trading firms that all simultaneously reacted to some technical warning signals and issued massive sell offs, which caused the enormous and unexplained reversion in the market. These are turbulent times, indeed. When the market can move that far, that fast, and for no reason, how does an average investor focus on his or her day job and sleep at night?

Since that incident, the exchanges have enacted measures to halt trading of an individual stock or the entire market if another inexplicable drop occurs. Clearly this is an attempt to reassure investors that the market won’t plummet too far again. But, absent any reasons for it happening, many remain skeptical that this is the solution to the problem. Simply put, there is too much uncertainty and too much change for the average investor to endure and navigate the stock market. Couple this point with the fact the market overall has been generally flat for 2010 and you have many disgruntled investors.

While too much volatility in the stock market will rightfully scare the average investor away from trading stocks, people need to invest in something besides the mattress to build a nest egg or they won’t have enough to retire. Adding to this financial heartburn are inflation fears fueled by the “inflationistas” in the major media, who believe we are headed for hyperinflation that will eat away all the cash under the mattress. They also say we will be battling it for an extended period of time starting in just the next few years.

I too, believe inflation is coming, but not necessarily the out-of-control hyperinflation predicted by some doomsayers. Rather, I think the Fed will tame it with high interest rates like it did in the early 1980s.

The price of gold (more than $1,287 per ounce as of September 22, 2010) is a reflection of this inflation concern. Gold is often a safe haven from the stock market, which is why many investors are opting to place their bets on the precious metal instead of blue chip stocks (the exception being gold stocks and other recession plays).

Besides gold, homes and land offer a great hedge on inflation, along with the proposition of being undervalued due to the massive amount of distressed properties. Hence, many investors are turning to real estate, which is close to home and seemingly less risky, even though the bottom in housing hasn’t been widely declared yet.

Real estate is gaining again among those who understand these forces and are seeking something other than risky stocks. Once the housing market has stabilized and we have restored confidence, more investors will be coming. Look out Wall Street, Main Street is going to take some market share, and rightfully so.

Paul Cardis is founder and CEO AVID Ratings, the leading provider of customer loyalty research and consulting to the home-building industry. Through the AVID system, home builders improve referrals, reduce warranty costs, and strengthen their brands. He can be reached at paul.cardis@avidratings.com.