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To: MulhollandDrive who wrote (2502)	9/9/1998 3:04:00 PM
From: mauser96	Read Replies (1) \| Respond to of 3424

OTOT... BP...I hadn't really thought of it that way, but your description of "a bunch of momentum players riding the same stocks up and down" is a pretty good description of todays markets. People buying into big mutual funds are getting diversification from an industry classification standpoint, just not from a size standpoint. Stock indexing has been a self fulfilling prophecy on the way up, but it will also intensify the fall on the way down if any correction gets steep enough. Almost by definition large caps have to dominate markets. Even if they do get very expensive the small caps can't absorb a lot of $ without quickly becoming overpriced themselves. But it certainly has been way too one sided the last couple of years. Actually, I think that there is a chance that the really beaten down small caps will outperform for a while after tax selling is over. Rising prices would quickly create a bigger demand for these stocks, but this is sort of a "chicken or the egg" argument. I don't know of a grenerally accepted definition of large cap, but I use about $12 billion as my dividing line. Some smaller caps with a compelling story are doing OK, but generally those persisting in holding small caps have been mauled.

To: MulhollandDrive who wrote (2502)	9/9/1998 3:37:00 PM
From: Sam Citron	Read Replies (1) \| Respond to of 3424

OTOT... This market imo, is terribly unhealthy if the majority of investors just decide it makes more sense to "index" their money. Sooner or later the disparity of valuation will be so extreme that once it is perceived that the indexes have run realistically run their course and people start pulling the plug based on valuations, what are we left with? I'm saying that when those stocks crash big time, the ripple effect on the overall market may be so severe, that it could be years and years before investor confidence is sufficiently restored to venture in again. We are seeing this play out in the small caps now. Some of what you are observing is normal Wall Street late business cycle. Remember when the market took off 16 years ago. Things were pretty bleak. Many small businesses had been killed by high interest rates and inflation. But oil prices and then interest rates finally crested and gradually the market started to come back. In the initial phases of any bull market, small growth stocks do tend to outperform the indexes. But as the bull matures, these smaller companies tend to underperform. The strong, like Compaq, routinely set up reserves to rescue themselves from a bad quarter, or, like Dell, spend great amounts of money buying back their shares to give generous gifts to employees, which has the same effect as a huge bull pool. Eventually the bull gets very long in the tooth. The surest sign is that companies come public with strange business plans tantamount to mining green cheese on the moon (or sell books on the internet <g> and obtain lofty market caps. By this time in the cycle, smart investors are either short or hunkered down in a nice safe index fund. Yes, the market will crash. It's just part of the business cycle. There will be a season for owning small stocks and that season will be the first sign of spring of the next business cycle after a long cold winter. But unfortunately, as usual, the season will be short. No longer than three or four years at best. The rest of the time, and over the long run, you are probably better off in a market cap weighted index. Such a trend may be unhealthy for capital formation as you suggest, as well as unhealthy for competition, and hence the economy in general. It suggests an oligopolistic market structure and the possibility of an unhealthy power in the hands of huge MNCs (multinational companies), which will race to the bottom, if necessary to route around unfavorable environmental, labor or other restrictions. Unfortunately Darwinian evolutionary forces are at work and I know of no easy cures. The rich are getting richer and the poor are getting poorer. Nobody said it's fair, but at least there are always opportunities. Sam