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Bull's roar drowns out the skeptics

Although the great bull market seldom stops to listen, many stock analysts and fund managers are raising the alarm once again about the dangers of high expectations.

Last year at about this time, there came a wave of warnings from Wall Street veterans who said the market was getting overheated. Since then, prices have surged another 40 percent or so.

But even as their credibility has taken a beating, the cautioners say their message is more pertinent than ever.

"I am not trying to forecast a market decline," said James Rothenberg, president of the Los Angeles-based Capital Research and Management Co., which manages the giant American Funds family of mutual funds. "But I think expectations of many investors are far too high."

"You don't want to be a Cassandra," Rothenberg said recently at a panel discussion among leading fund executives sponsored by the Forum For Investor Advice, a trade association of mutual funds sold primarily through brokers. "But many people who have a strong belief in their investment skills in fact may be confusing skill with a raging bull market."

What troubles quite a few observers is the way stocks have kept jumping this spring even as growth in corporate earnings has slowed dramatically.

"Judging by the reaction of the stock market to the March-quarter results released so far, the rules seem to have shifted," said Greg Smith, investment strategist at Prudential Securities. "Under the market's charitable new rules, even disappointers are rewarded, on the theory that the bad quarter is out of the way. Logic like this can be dangerous."

The problem is, many investors have grown accustomed over the past 15 years to scare stories that never happened.

"We have been cautioning investors for a long time," Bridget Macaskill, chief executive of New York's Oppenheimer Funds, told the symposium. "If they had believed us, they would have missed some very good returns."

Macaskill also noted that cautionary comments, no matter how well-reasoned, run the risk of encouraging people to jump in and out of the market rather than patiently riding out short-term fluctuations. "We don't want to be in the position of advocating market-timing," she said.

The issue of lofty expectations takes on more and more weight as time passes and the pot of assets invested in stocks and stock funds keeps getting bigger.

How can investors walk this tightrope? Many analysts urge them to stick with good stocks and stock funds, but also to stay carefully diversified and to be on guard against complacency and greed.

"Compromise is called for," said Standard & Poor's Corp. in its weekly letter "The Outlook." "Keep participating in the market, but strive for risk-containment through a balanced-portfolio approach, including bonds and some reserves. You won't keep up with the stock benchmarks, but you'll be in a better position when a correction occurs.

"This undoubtedly is an era of extraordinary gains in productivity, inflation-control, deficit-fighting, global consumerism and investment demographics. With such a background, the cycle of success breeding greed can carry stocks much further than in the past. But risks are high, so move slowly."

In the discussion at the Forum For Investor Advice's event, Edward Taber, senior vice president at Legg Mason Inc., put it this way: "We're 16 years into an eight-year bull market."