This is a republication on the web of a magazine article from 1999. It’s fairly brief, but it highlights some key points in mutual fund history in the U.S. I’ve always believed a good investor is a good historian. It’s important to take long-term perspectives such as this.
Fund managers themselves are feckless forecasters. One of the easiest ways to measure managers’ views of the future is to count their cash; when funds hold 10% or more of their assets in reserve, they are bearishly waiting for stocks to turn cheaper. When cash is low, at 5% or less, bullish managers have already spent most of it on stocks.
Over time, you can use fund managers’ cash positions to forecast the market’s returns with remarkable accuracy — as long as you do the exact opposite of the managers. In 1951, for example, cash balances in stock funds set their all-time record high of 15%; over the next decade, stocks grew at 16.4% annually, among the biggest gains the U.S. market has ever produced. And when did cash positions hit their record low? In 1972, when they shrank to just 4.2%; that’s the most optimistic fund managers have ever been. Over the next two years, U.S. stocks lost 37% of their value, the worst loss since the Great Depression.