LAPPIN: You have to push away [from the averages] and see what’s really happening to the bulk of stocks. The market right now is like a game of musical chairs, and the music is going to stop. The number of stocks going up continues to shrink. The trends under the surface are really quite negative, but they’re not obvious to the naked eye.

I purposely picked from a wide array of industries. And these are not racy stocks that somebody would think they’d lose their shirt in: Dell Computer, Home Depot, Intel, Merck, Kellogg, Philip Morris, Sallie Mae and Wal-Mart. Since January each of these favorites [has seen declines].

The number of stocks making new highs is down. The Dow is masking that the number of the stocks losing is higher than the number gaining. And one of the things you’ve seen is that the stocks that are doing particularly well are the highly speculative kind of investments. To call them “investments” is a misnomer. When people start speculating in commodities like gold and buying casino stocks, it’s usually very late [in a bull market]. Then there has been this tremendous calendar of new issues. Take Discovery Zone [a chain of children’s play centers, which went public Friday at $22, and closed at $35.50]. They’ve got [under] $50 million in sales and no earnings. Now they’ve got a market capitalization of $600 million. I wouldn’t pay that price for anything with no earnings. It’s absurd.

The average investor must understand that if you buy a new issue and you look back a year later, you [probably] will have lost money. A company is not going to sell stock when it’s at a bargain price. I’ve always taken the attitude that, when you see an interesting new company, you can probably put it aside, then tune in six to 12 months later and probably buy the stock at a much better price.

We have about 45 percent cash. We don’t normally ever have cash. But the question is, are we finding investments where we really think the reward outweighs the risk? Our largest single holding is Time Warner; we’ve owned that for a couple of years. That’s a good example of our approach; we tend to buy things when they are out of favor. I was buying Time Warner a couple of years ago. You know, here was the world’s best media company and everybody was beating on it. I looked like a fool for several months, but nobody’s making fun of me now. We have a position in Global Marine [which makes drilling equipment]. We haven’t had a national energy policy for as long as I can remember, and supposedly one is being formulated. If there’s any effort to encourage drilling in the United States, it’s going to be very good for service companies.

The reality is that you have intervals when people make a lot of money and then periods where they don’t make any money. Yes, if you bought stocks in 1920, held them till today and you had the right ones you might have done all right. But the fact is, the Dow was up in the 1920s, but then in the ’30s it was down 40 percent. In the 1950s it was up, but in the ’60s and in the ’70s you gave that all back. Lately I’ve been feeling like it’s the ’70s.

There are a lot of [professional] people taking money off the table, while the little guys are pouring it in. There’s been a huge amount of money pouring out of money-market funds. . . into mutual funds. One of these days all this money may turn around and want a fast exit . . . when these small guys realize they have lost 10 percent to 15 percent of their money.

Before [the recent market surge], we were expecting that the Dow would drop by 7 to 10 percent and the NASDAQ [over-the-counter market] would drop twice that; I still think that’s the case. The longer it goes before we have a correction, the more severe it will be.