Equity investors disturbed by last week's fall

Inspir3d reads a 1999 BusinessWeek article and decides that he is not Warren Buffett, so there may be no reason to sit on cash just because the billionaire investor does.

Buffett not Investing, but we're not Buffett
There has been lots of talk regarding Buffett sitting on a huge pile of cash and not being able to find bargains. But the following interview should dispel any thoughts that this should apply to the rest of us value investors who handle a much smaller amount of capital.

Keep in mind this interview was conducted in '99, when the bull market was nearly at its peak, and prices were soaring.

Warren Buffett On the size of his stock portfolio:
"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."

"The universe I can't play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."

Some context is probably helpful. Since the publication of that interview on 25 June 1999, the US stock market as represented by the large-cap S&P 500 is down 13 percent. Small-cap US stocks as represented by the S&P 600, on the other hand, is up 69 percent.

If larger companies are overvalued today, unlike in 1999, small companies may not be good places to hide. And after last week's market action, Wall Street may be starting to look for places to hide.

Wall Street Eagerly Awaiting New Earnings
First-quarter earnings season can't arrive soon enough for Wall Street. Besieged by disturbing data on the economy and inflation -- and hurt by disappointing earnings in the technology sector -- the markets saw their worst week since August, with Friday marking the Dow Jones industrial average's biggest drop since May 19, 2003.

As a result, investors are desperate for good news, and plenty of it. It will take a nearly unbroken string of positive earnings reports and forecasts to get the market out of last week's funk.

Even then, however, any move higher could be relatively short lived. The economy is still expected to slow considerably going into the summer, and it will be more difficult for corporate America to keep up earnings growth if people end up spending less due to oil, inflation or a combination of both...

The macroblog looked at some of the economic indicators released at the end of last week and asks whether they are more signs of a cooling economy. No wonder that even Roger Nusbaum, who generally does not believe in getting spooked by short-term market action, decided to turn defensive at the end of last week.