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Funds rap day trading
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May 7, 1999: 2:38 p.m. ET
Managers at Morningstar conference warn of grim future for day traders
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NEW YORK (CNNfn) - Fund manager Bill Nygren can't bring himself to call day traders investors. The closest he gets is to call them entertainment seekers.
"To speak of day traders in any investment context is silly," said Nygren, manager of the $1.4 billion Oakmark Select Fund, which has beaten the S&P 500 since its launch in 1996. "These people are fulfilling a need for entertainment and are using the stock market for that."
Put together a group of professional money managers these days and one of the topics that's likely to come up is day trading. Sure enough, the issue surfaced at Morningstar's mutual-fund conference in Chicago earlier this week.
A grim forecast
"It's all going to come crashing down on them and it's going to bring other stocks with it," said Wallace Weitz, manager of the Weitz Value and Weitz Partners Value funds. The funds are ranked first or second in their categories at Morningstar and are also beating the S&P 500 year to date as of Thursday.
Day traders buy and sell dozens of stocks during the day, capitalizing on the "spreads" -- the tiny differences in price between the buy prices, or bids, and the sell prices, or offers. They might hold stocks for as little as minutes.
In the past, only big Wall Street investment firms could profit from spreads. But changes in trading rules and technology advances have opened the door for small investors.
While nobody has kept statistics, thousands of people have flooded into the day trading business, quitting their jobs to trade full-time. This is occuring even through industry experts admit only 10 to 15 percent of day traders will be successful.
"They're cowboys," said David Liu, manager of the Strong International Stock Fund. "When you buy and sell something 20 or 30 times a day you're not an investor any more. These people are not investors, period. They're traders."
A bull market phenomenon
Why do professionals raise their eyebrows about day traders?
Managers think day trading started at the height of the bull market, when most people are making money. But day traders who sit home in front of their computer screens have never seen what happens in a down market, the pros argue. The trades also add to volatility.
"They are novices," Liu said. "When there is a bull market, yes, they can make money. But once the music has stopped, day traders will disappear. They will lose so much money, I tell you."
Day traders also tend to buy some of the riskiest companies, such as Internet stocks, because their prices swing the most. But many managers worry about the inevitable "burst" of the so-called Internet bubble.
"The people who own Internet stocks are taking on a very high level of risk," said Nygren, of the Oakmark fund. "Myself and most of the other managers at the conference are concerned about people who own and trade those stocks not understanding the risks they're taking."
Supporters point to benefits
James Lee, president of the Electronic Traders Association, an industry group in Houston, argues that day traders have been demonized by Wall Street because they're muscling in on the action.
"It's like El Nino (the climate phenomenon) -- day traders get blamed for everything," Lee said. He is also president of the day trading firm Monument Securities Management Co. in Houston.
Lee argues that day trading pumps valuable liquidity in the market and lowers prices for both institutional investors and retail investors. He also believes big investment houses are hollering about day trading because now they aren't the only ones profiting from spreads.
SEC Chairman Arthur Levitt recently warned about the perils of online trading and called most day trading gambling during a speech at the National Press Club in Washington.
But Lee thinks Levitt was referring to the fringes of the day trading market. "He's trying to wake people up to responsibility," he said.
Liu, of the Strong fund, agrees liquidity is good for the market. He also pointed out that by some estimates only about 10 percent of the volatility is caused by day trading.
Nygren sees another benefit. Since day trading raises volatility for other stocks - raising those prices -- it helps keeps the value stocks he likes to buy at fair prices.
"As a money manager, I like to see volatility in the stocks I don't own," Nygren said. "To the extent that day traders drive up some stocks and drive down others, it creates opportunities for me."
Nygren's fund has earned 19.14 percent year to date as of Thursday, outperforming the S&P 500 by 10.34 percentage points, according to Morningstar. It is ranked third in its category.
As for the day traders, Nygren thinks in the end they'll only be hurting themselves. But he worries that it will scare a generation of investors out of the market, much like the aftermath of the stock crash of 1929.
"Most of us are very, very skeptical about what long-term success day traders will be able to have," Nygren said. "I think they will be badly disappointed." 
-- by staff writer Martine Costello
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