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IN DEFENSE OF DAY TRADERS | PAGE 1, 2
If you find this unpleasant, imagine how it feels to professional investors. The practical upshot of an increasingly efficient market is that it is smarter than any single investor. As a result, it becomes difficult, if not impossible, to beat the market -- as an increasing number of fund managers have found out over the last few years. (More than 90 percent of U.S. fund managers have been beaten by the S&P 500 index each year for the last five years.) And despite the gold-rush press, many Internet investors -- including some sophisticated mutual funds that wandered into Internet stocks just in time for the tumble of two weeks ago -- are finding out the same thing. What rankles the big players is that smaller stocks, like the new Internet companies, used to be where they could go to spike their portfolio's performance. Traditionally, it has been easier to find 10 small stocks that will move 30 percent than one big stock. But that refuge is being taken away as hordes of efficiency-creating online investors descend on the small-company market. The result? Internet and small-stock markets are already as hard to beat as the larger markets that have been kicking professional investors' asses for the last five or even 10 years. So chalk up some of the fear and loathing of day traders to simple resentment. There has been a market coup: The old inmates in the investing asylum have been removed for new inmates -- and the old inmates aren't happy about it. What's more, they have the media's ear and aren't afraid to wax self-servingly woeful about the future. But that's not the only factor at work. By the time big stocks get big, most of the serious unpredictability has been weaned out of their business. No one is wandering around touting order-of-magnitude different estimates of the sugared-water market. But that's exactly what happens in market researchers' forecasts for Internet markets. This exuberance will eventually regress to some sort of mean, just as happened when USA Networks slapped a clear and down-to-earth sticker price on Lycos (to the consternation of some Lycos shareholders). That newfound certainty will create more stable share prices. And stability matters, if only in the long run. Because the goal in what stock exchanges like the Nasdaq call an orderly market is to allow people to buy and sell oodles of stock without making the price blip about. That is demonstrably not the case today in Internet stocks -- partly because their business is so uncertain and partly because shares in these companies are relatively scarce. But the same problem exists for any small stock. When a large investor wants to buy a small stock, it's like an elephant hopping into a wading pool. But that's no argument for regulating wading pools to keep them clear for wandering elephants. Better just to politely suggest to the elephant that it's not going to have a very good time here and should find its fun elsewhere. If large investors continue to slosh about in stocks that are too small for them, they should not be surprised if they take a bath -- it's just the market's way of telling them they're in the wrong place. Something important and special is happening in the stock market. It is
messy, unpleasant and noisy, but it is an inevitable and technology-induced
change. A new generation of investors is on the scene, and they are making
life tough for everyone -- including, eventually, themselves, as they
inexorably make the market more efficient. But that is a good thing, a
necessary change, and part of creating markets that are safe for everyone,
from elephants to erstwhile villains. Paul Kedrosky is a frequent contributor to the Economist, the Wall Street Journal and other publications.
Bear
essentials: Christopher Byron explains how day traders have fueled the
tech market roller derby
Night of the living day traders: They buy and sell at ultrasonic
speeds. They rarely leave their desks. And they're obsessed with the Net. |
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