09 Mar 2009 The Torray Fund - Annual Report ( Portfolio )
...a market environment characterized by low volumes and high volatility which has attracted speculators but scared off long-term investors. Sources at the New York Stock Exchange have told us there are an estimated several million day-traders gambling with their 401(k) plans - some, unfortunately, unemployed. These trading accounts can be leveraged four-to-one ($100,000 of equity supports a $400,000 portfolio) provided the positions are liquidated by the end of each day. You may have noticed the market’s recent gyrations and heavy volume between 3:40 and its 4:00 close. It is during this period that many large blocks of stock and most of the outstanding day-trading margin debt are cleared, a phenomenon that occasionally has caused volume to as much as double in 20 minutes. (The orders are entered into the Exchange’s electronic system, nicknamed “the dark hole,” where they are matched by computers.) This activity has triggered wild swings in the Dow Jones and S&P 500 indices, heightening investors’ anxiety...

Also worth noting is the Federal Reserve’s measure of assets available for immediate spending - i.e. cash or equivalents - jumped 86% to $8.9 trillion in the first 11 months of last year. That is enough to buy 75% of all domestic stocks. By contrast, at the market’s peak in early 2000, the same Fed measure totaled $5 trillion, or 20% of the market’s total value, suggesting that investors are more fearful of losses at today’s low prices than they were when the market was twice as high. If history is a guide, when the current financial distress passes and the economy recovers, investors will quickly change their minds and pile back into stocks, causing them to rally sharply. This classic “buy high - sell low - buy high” syndrome has afflicted investors since the earliest days of exchanges.