But you can think of cash as an option, conferring the right, but not the obligation, to pick up assets cheaply during panics. Unlike other forms of option, this one pays you a premium, and never expires.

This option is only useful if you can tell the difference between a cheap and an expensive equity.

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The 1970s were a heyday for such strategies. Small but systematic market inefficiencies lurked everywhere. Computers were not widely available, so the few who had access and capability were at an advantage.

By the mid-1990s, most such opportunities had been competed away as understanding became widespread. But the democratization of data and computation was not finished.

By 2000, a small fund could afford fundamental and other data from specialized services like Compustat ($12,000/yr).

By 2002, an individual could obtain reasonably accurate U.S. company and stock data from free services like MSN Money. One could also filter the data set for free, to find all companies fitting a particular profile.

In 2006, these capabilities were spreading to worldwide markets, beginning with London.

It’s reasonable to assume that, very soon, investment managers will have no information advantage in terms of data and screening capability. It will all be instant and free, for everyone.

What’s left? Plenty. As always, strategy — defined as the profit that remains when your competitors execute perfectly — provides the direction.

Financial industry structure always forces a short-term bias. Because clients can pull their money out any time, there is irresistible pressure for investment managers to focus on short-term gain. This is a competitive inflexibility shared by almost the entire investment management industry. As a result, long-term strategies are likely to retain a larger advantage, for longer, than any other strategy.

Short-term bias forces non-fundamental strategies. When a fund manager is under pressure to hang onto clients by delivering an extra 100 basis points this month, he has no time to wait for intrinsic value to be recognized. That can take months or years, and he’ll be fired or out of business by then. So his effort inevitably goes to strategies that attempt non-fundamental strategies, those that try to guess short-term price movements. Individual investors tend to do the same, simply due to impatience. Thus intrinsic value strategies are less competitively exposed.

Index funds are a non-fundamental strategy. Index funds simply buy everything — they do not have the flexibility to stay out. Again, intrinsic value strategies are less competitively exposed.

Non-fundamental strategies are destabilizing in aggregate. Relative-price investment schemes — those that buy or sell based on a stock’s price relative to other stocks — are popular, yet distorting and destabilizing in the aggregate. This definition emphatically does include index funds. Since such “investors” are simply reacting to one another, trends are amplified. This is the reason stock prices are not normally distributed (the “fat tails” distribution problem). It is the source of bubbles and panics, and will always create opportunity for the investor that makes decisions only based on price relative to intrinsic value.

In summary, what’s left is intrinsic value, always intrinsic value. If it says to stay out of the market altogether, then so be it. But that won’t always be true.

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