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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | AUGUST 6, 2004
By Amey Stone On the Street, the Tough Crowd Rules [Page 2 of 2] BYE-BYE, LITTLE GUY. And it's not just hedge funds using these strategies. Brokerages and investment banks are increasingly making profits from their own proprietary desks, where traders act as in-house hedge-fund managers investing the firms' own capital. Even the more plain-vanilla mutual-fund industry is increasingly turning out funds that use hedge-fund-like techniques -- short-selling and layering on options -- to improve returns while reducing risk. At least that's the theory. All this is happening at the same time individual investors continue to take to the sidelines. At Charles Schwab, still the king of the discount brokerages despite a slump in its business, revenue from trading plummeted 20% in this year's second quarter vs. the first. Flows into mutual funds, strong early in the year, dried up in May and have limped along since then. More professionals who employ a buy-and-hold strategy are joining those individual investors on the sidelines. Star Value funds (which invest in undervalued stocks for the long-term) are sitting on more and more cash. For example, the Clipper Fund (CFIMX ), and Longleaf Partners (LLPFX ) both have about 30% of assets in cash, according to Morningstar. "For the time being (a short time we hope), it is better to do nothing than to do something dumb," Clipper managers wrote in their first quarter letter to shareholders. The king of long-term value investing, Warren Buffett, was holding $36 billion in cash in Berkshire Hathaway (BRK.a ) at the end of 2003, up from $13 billion at the end of 2002, and $6.5 billion at the end of 2001. The reason, he explains in this year's shareholder letter, is that he's not finding enough businesses or stocks to buy with "opportunities for significant profit." IT'S A JUNGLE. For individual investors, Buffett's unease and the new frenetic investing climate seem to argue for staying out of the market. If Oracle of Omaha doesn't see opportunities, the logic goes, how much hope does the small investor have? Yet some experts argue that just the opposite is true: There may be more opportunities than ever for small investors to take advantage of temporary inefficiencies created by all this short-term trading. "My advice to individual investors would be to swim in a different part of the ocean," says Schwab's Forsythe, whose rating system has far outperformed market indices in the past year. "Be longer-term oriented. Use value-oriented criteria to select stocks. Leave all the momentum plays and technical indicators to the hedge funds." In the long term, fundamentals like earnings growth and valuation will hold sway, even if the short-term picture is increasingly distorted. As Panzner explains in his book, even small investors can thrive in the stock market jungle if they know how to maneuver amongst the large and voracious predators that surround them. Understanding the impact of hedge funds, program trading, and derivatives can help. "The universal rules haven't changed," he says. "It's always a case of know your enemy." Being in a more ruthless and random environment may feel more dangerous, but investors who do their homework can still make money, the experts say.
 Stone is a senior writer for BusinessWeek Online in New York Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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