You can't say they didn't warn us.
One striking aspect of the recent decline in stock prices is how many top-performing fund managers saw trouble coming.
It hit me again about a week ago, as the Standard & Poor's 500-stock index took a 3.3 percent tumble, when I checked a Bloomberg list of the top growth and value stock funds over the past 10 years. Several of these funds' managers have been flying caution flags all through early 2005, if not longer.
"Almost everything looks expensive" in an "over-valued" stock market, wrote Wally Weitz in a shareholder letter for his Weitz Value Fund and Weitz Partners Value Fund, which returned 16.7 percent and 16.6 percent a year, respectively, from the end of March 1995 through the end of March 2005.
"Looking out over a three- to five-year period, we continue to believe that returns from the broad equity market will be modest and could be punctuated by some unpleasant negative contractions," said chief executive Harry R. Hagey and President John A. Gunn in the annual report of the Dodge & Cox Stock Fund, which boasts a 15.8 percent-a-year gain for the same 10 years.
"Both in bonds and equities, we are taking extraordinary measures to protect capital, since we believe we are in a period of diminished investment returns," manager Robert L. Rodriguez said in a speech last year, around the time he closed the door to new investors at the FPA Capital Fund. It boasts a 10-year gain of 17 percent annualized.
Among 900 growth or value stock funds, FPA Capital's 10-year gain ranked No. 6, Weitz Value No. 7, Weitz Partners Value No. 8 and Dodge & Cox Stock No. 15. For comparison, the S&P 500 returned 10.8 percent a year, and the Nasdaq composite index rose 9.8 percent a year in the same stretch.
Ten-year results are worth a close look because they cover both the boom of the late 1990s and the bust of the early 2000s. The S&P 500's gain from early 1995 through early 2005 is reasonably typical of its long-term average of 9 percent to 10 percent a year. The last five years, in which the S&P 500 lost 3.1 percent a year, may be less representative.
Not every fund manager on the 10-year honor roll takes a cautious view. At the Legg Mason Value Trust, which ranks No. 4 on my list with a 17.1 percent-a-year gain, manager Bill Miller has lately described himself as "quite optimistic." Over time, I think, the bulls still figure to prevail, though perhaps not as emphatically in the next five or 10 years as they did in the past 10.
Even so, the abundance of caution is enough to give anyone pause. Some of these managers have been backing up their words with actions, keeping large cash reserves. FPA Capital, at last report from researchers Morningstar Inc., was 28 percent in cash, Weitz Partners Value 31 percent and Weitz Value 32 percent.
That compares with liquid asset ratios for all stock funds that lately averaged between 4 and 5 percent, as tallied by the Investment Company Institute.
What's a long-term bullish investor, looking for growth, to make of all this? Some perspective is provided by the managers at Dodge & Cox, who say, "Forecasting is difficult, and rather than overly concerning ourselves with anticipating the direction of the broad market, we focus our energy attempting to understand the long-term risks and opportunities of each company in the fund."
Hagey and Gunn recall that they went into 2004 with a similar wariness. Dodge & Cox Stock wound up the year with a 19.2 percent return that beat the S&P 500 by more than eight percentage points.
None of the cautious commentators suggested using his views as a basis for market timing. "The fact that stocks are expensive does not mean that they will go down anytime soon," Weitz wrote. "In the short run -- and that can mean months or years -- stocks can go from expensive to more expensive."
Optimists like to say that a bull market "climbs a wall of worry" -- that market advances thrive on rampant skepticism, because it assures a large body of potential future converts to the bullish cause.
That argument doesn't pack its maximum force in this instance, however. A contrary-opinion case isn't so easy to make when the opinion you are gauging comes from the very managers who made the most of bullish opportunities in the recent past.