Man Vs. Machine: Stock-Pickers, A Dying Breed?

Bob Olstein is a stock-picker's stock picker. He has been at it for 42 years—picking stocks the old-fashioned way: by the numbers.

Still, there are times the mutual fund manager admits to feeling outgunned by the machines and the proliferation of exchange-traded funds. "I absolutely feel like Jonathan Livingston Seagull right now—Okay?"

This has been a tough, confusing time for serious stock pickers, whose investment strategies are based on the fundamentals of businesses.

As stocks get swept into various indexes by ETFs and are actively traded via algorithms and machines, there is genuine concern that these changes are leading to the death of stock-picking as we know it.

“You can’t fall in love anymore,” says Cleve Rueckert of Birinyi Associates.

That’s been a longtime theme of his boss, Laszlo Birinyi, who in 2003 published a controversial report in 2003 titled, “The Death of Long-Term Investing.” (Watch video of Birinyi's most recent appearance on CNBC.)

Birinyi’s thesis is that the impact of such regulatory changes as the SEC's fair disclosure regulation —requiringpublicly traded companies provide material information to all investors at the same time—combined with the creation of new markets and the use of technology in trading would favor short-term thinking.

Today, Rueckert says the surge in ETFs has made the markets that much more liquid, making it even “easier to get in and out faster.”

Some professionals, like Birinyi’s firm, are fighting back at the trade-sniffing machines by entering small trades of about 100 shares—even if they’re trying to acquire large amounts of stock. That’s true even for big companies likeCitigroup, whose average daily trading volume of 503 million is done largely in hundreds, not thousands, of shares.

"When 10,000 shares of IBM traded, people took note,” Rueckert says. “They saw that and said, 'Oh something going on here.' So there's been a big push to hide those orders."

It’s reached at point that I have heard of some large hedge funds that, in pursuit of anonymity, have quietly shifted their trading to Charles Schwab's StreetSmart Pro. (A Schwab spokesman could not confirm this.)

Olstein also tries to avoid have his trades avoid detection by the machines, but that doesn’t sway his belief in the future of his style of fundamentals-based investing, which values companies strictly on their ability to produce future excess free cash flow. “You have to have patience,” he says.

But hasn’t the world changed?

"This my 15th world change—Okay?"

Olstein, like other veteran managers we interviewed, concedes the markets have become considerably more volatile. But they all believe they will be among the survivors because, in the end, fundamentals always trump volatility.

"I will be standing,” Olstein says, “And these quick traders and these machine traders— everybody who's got the new perfect way to behave, they're in trouble."