Five years ago this week, the great Bull Market was born. On Aug. 12, 1982, amid a dismal economic environment of double-digit interest rates and high inflation, the Dow Jones industrial average skidded to 776.92. But from that day on, the bull market has scarcely broken stride.
Today the Dow stands nearly 1,900 points higher, soaring some 235 percent. The Federal Reserve Board calculates that this bull run has increased America's wealth by $1.8 trillion, or about $75,000 for every man, woman, and child in the country.
``I'm sure we've seen the five greatest years I'll ever see,'' observes Anthony Gray, president of Sun Bank Investment Management in Orlando, Fla. Sun Bank's equity fund for pension money, up an astonishing 454.3 percent, gives it the best five-year returns among all United States banks tracked by CDA Investment Technologies, a research firm in Silver Spring, Md.
Still, the Dow tucked 19.93 points under its belt last week as it charged toward 2,600, closing Friday at 2,592.00. Strong corporate earnings and heavy foreign buying are fueling the surge. This unbridled run encourages speculation that even greater heights are yet to come.
The popular guru of this bull market, Robert Prechter, predicts the Dow will climb for another year to 18 months, reaching the upper 3,000s by the end of the year. ``This is an educated guess based on time cycles: It could come sooner,'' says the editor of the Elliott Wave Theorist, a Gainesville, Ga., investment newsletter that analyzes financial cycles.
Among newsletter advisers, Mr. Prechter has the best market timing record over the past five years. Although he sees a stratospheric Dow, he also believes that between now and the bull's last hurrah, the Dow will have a 16 percent ``correction.''
And after the market peaks, he worries that it could crash.
``There are always great differences in markets,'' says Prechter. ``I've been making the case that the bull market of the 1980s is similar to that of the 1920s. Whether the aftermath is the same remains to be seen,'' he concedes.
While Prechter's predictions were considered outlandish just a couple of years ago, many now agree with him. For instance, Al Frank, editor of the Santa Monica, Calif., Prudent Speculator newsletter, thinks the market will hit 2,700 this year, and 3,600 or more next year.
``The stock market usually rises the year before and during a presidential election,'' he observes, adding that this rally could last for another five years, ``but we're going to be very careful as 1988 unfolds.''
Mr. Frank, who also manages $75 million for individual investors, has compiled the best investment record among newsletter advisers during the last seven years (up 598 percent) and 4 years (up 260.3 percent), as rated by the Hulbert Financial Digest, a publication based in Washington, D.C.
Frank's investment philosophy focuses on finding undervalued stocks through fundamental analysis. Indeed, checking the five-year bull market performances of the best banks, pension, newsletter, and mutual fund equity managers, most cases show that value-oriented investors produce the best returns. This remains true, despite the vigorous protests of value strategists for several years now that stocks are grossly overpriced.
Frank's rallying cry is ``PASAD'': patience and selectivity and diversification. ``Most people go wrong because they're impatient,'' he observes. ``Many, many people can select stocks, but very few can withstand market drops.'' He has held some stocks more than 10 years, which is how long he has been managing his portfolio.
``We're very patient,'' he says. ``Patience is not sloth or indifference.''
Every month, Frank and his staff of five look at 4,000 stocks. Each week, some 600 stocks are tracked by computers that compile such value indicators as price to earnings, price to sales, and growth rates.
Frank's portfolio has lagged slightly behind the market this year because of a heavy position in secondary stocks that have generally been underperformers. But, he says confidently, ``Their turn is coming. The last two years have been a blue-chip rally. Before a market tops out, the secondaries receive a lot of play.''
Indeed, the NASDAQ over-the-counter composite average posted its first record close last week since March.
Cashman, Farrell & Associates finds value at the other end of the spectrum. The Wayne, Penn., pension fund manager sifts the 1,000 largest companies, as determined by market capitalization.
In the first cut, the firm picks only companies with the lowest price-earnings ratios. Then, the stock must be ``out of favor'' in the investment community.
``We look for a stock that's substantially down from its 12-month high or has underperformed the market for a year or more,'' explains partner James Farrell. If the stock meets these initial criteria, the firm employs a bit of ``plain old fundamental analysis.''
The strategy has worked well. This year, Cashman Farrell had a major chunk of its portfolio in energy stocks before the group soared. As a result, the equity pension fund is up more than 36 percent, despite carrying a dead weight of 35 percent cash. In the five years ended June 30, Cashman Farrell was up 327.3 percent, versus the 241.2 gain clocked by the Standard & Poor's 500 index.
As indicated by their cash position, the partners are quite cautious.
``The only values we're finding here are in financial stocks [regional banks and insurance] and utilities,'' Mr. Farrell says. He sees the market at current heights as ``increasingly vulnerable. I'd rather be in a utility yielding 8 percent now than some industrial company selling at 30 times earnings and yielding 1.8 percent.''
Value hunting among financial service stocks or property and casualty insurance stocks in Japan has paid off for the folks at Merrill Lynch's Pacific Fund, which is the mutual fund with the best record (up 492.1 percent) over the five years ended June 30. The falling dollar kicked in a fair portion of that gain.
But, says Norman Harvey, senior vice-president of Merrill Lynch Asset Management, the ``No. 1 reason the fund did well is that we stayed away from the blue-chip export companies, especially in the last two years. They were hit very hard when the yen strengthened.''
Although Mr. Harvey admits to being a little more defensive now, about two-thirds of the fund is still in Japan and still heavily invested in property and casualty stocks. The next largest position is in Australian stocks.
Mr. Gray at Sun Bank says he is quite concerned about current American stock prices being too high. But he says he has ``been equally concerned for most of the last five years.''
While most of the top money managers interviewed made their gains by taking a value-guided, buy-and-hold approach, Gray is a relative-value trader. ``We're much more particular about price. We may love General Electric at $55 but think it's average at $57, and overpriced at $59.''
Sun Bank's strategy involves identifying an undervalued industry group, then jumping in and out of the most undervalued large blue-chip stocks within the group.
``We pay close attention to relative values,'' Gray says. ``If GE is a better value than Emerson Electric, we'll sell Emerson and buy GE. The next quarter we may go back to Emerson.''
Sun Bank's largest holdings are in technology and food stocks. The equity fund has no banks and no utilities. Lately, Gray has been buying cyclical stocks. ``We're a bit uncomfortable with cyclicals. We're not that sure the disinflation cycle is over, but it seemed prudent to hedge our bets.''
What pearls of wisdom have these successful money managers mined from the five years of stock market plenty? One, Norman Harvey at Merrill Lynch, summarized the prevailing opinion best:
``Given the volatility of the equity markets around the world, being a value buyer, a patient, long-term investor, keeping an eye on your holdings rather than the market swings, is the most prudent strategy.''
A story on the bull market in yesterday's Monitor said US wealth has increased by $75,000 for each man, woman, and child. The number should have been $7,500.