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September 30, 2002

Forget the 1990s

By Kathryn M. Welling

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Ralph Wanger, the pater familias of the Acorn family of funds - which he sold pretty much at the top of the bull market to Columbia Management Group, a subsidiary of FleetBoston Financial, but still guides as president and CIO of its Liberty Wanger Asset Management unit - was in a jocular mood when I called. Asked for his interpretation of the market's erratic pulse as the late summer rally smacked into early fall's hard realities, Ralph's response was rapid-fire, his tongue, firmly in cheek.

"I have very different and complex theories about the market. Granted, some of your other sources have had similar ideas-but not nearly as cogent or well thought out." I let that pass, because I couldn't get a word in edgewise, as Ralph continued: "Item the first: Markets come in two major flavors -

Bull and Bear

At that point, I couldn't hold my tongue. "Bull and bear? Or are you talking strawberry and vanilla?"

"I like mint chocolate and butter pecan, if you want to get technical," came his retort. Then Ralph got down to business. "Seriously, one is what I would call an exponential market, a long period in which markets go up and make new highs almost every year. We just had the best one of those in history, from 1982 to 1999. There have only been two others like it in the United States. One was from about 1922 to 1929 and the other 1955 to 1968. In each of those cases, it was very important to be in the market and be fully invested; to identify the strongest groups and to buy the riskiest stocks in the strongest groups and get rich. And in each case, many people did."

Modesty precluded Ralph from adding something to the effect of "myself, prominently among them." Still, there's no gainsaying that Ralph, along with anyone who invested with him over the long haul in his Acorn fund, did very well, indeed, in the long bull market.

But Ralph wasn't interested in basking in past glories. He had a point to make: "In an exponential market, risk is your friend and buy and hold is the optimal portfolio strategy. The only thing better than doing that is buying and holding on leverage-although then you can get bounced off in some of the short-term reactions, like 1987. But as I said, there have been only three of those exponential-flavored markets in what I am going to say was all of market history. Because my contention is that market history did not exist before 1920."

"Well," I ventured, "markets certainly existed, so you must be implying that you don't trust the records that were kept-"

"The statistics are junk and the companies were junk and it is very hard to get anything reliable," he shot back. "So there have only been three of these big moves in history in the U.S.- although Japan in the 1980s is certainly a major additional example of an exponential market."