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<font size="4">Public Participation 10</font>

Public participation in the stock market is highest at major peaks at lowest at important
bottoms. Historically, whenever the public has bought"en masse" they have always been wrong
and have always ended up losing vast amounts of money. The problem now is that public
participation in the stock market through investments in equity mutual funds are at the highest
levels ever, and that participation has actually increased since the market peak. This solidifies
our conviction that the market has not bottomed and that massive capitulation is still ahead.

The mania that consumed investors around the market peak in early 2000 is evident in the
numbers. In February 2000 investors' net purchases of equity mutual funds amounted to $55
billion, the most ever for a single month. For the entire first quarter of 2000 net buying
amounted to an incredible $140 billion. At the end of that quarter total equity mutual fund
assets hit $4.5 trillion, of which about $4 trillion was accumulated during the decade of the
1990s. The $4.5 trillion represented 30% of total market capitalization. Now, about two and a
half years past the peak, assets in equity mutual funds have declined to $3 trillion, but
represent about 37% of market capitalization.

These figures dwarf the comparable amounts at the time of the last major bear market in the
1973-1974 period. At that time equity mutual fund assets were only $56 billion (no typo) at the
peak and $31 billion at the bottom with both figures comprising only about 5% of total market
capitalization.

With the help of Tucker Gilbert and the other people at the Investment Company Institute we
were able to get some additional data shedding some light on the degree of public participation
in the two periods. In 1973-1974 there were 365 equity funds at the peak and 314 at the
trough. This number gradually declined to 288 by the end of the decade. The total number of
shareholder accounts at these funds was 11 million at the peak, 10 million at the bottom and
down to 7.2 million at the end of the decade.

By way of comparison, let's look at the current environment. There were 4,000 equity mutual
funds at the peak in the first quarter of 2000 and 4,800 now. Shareholder accounts numbered
154 million at the top and have actually grown to 169 million today.

There are two major points we would like to make about these figures. First, the sheer
magnitude of public participation in the stock market through mutual funds in terms of both
dollar amounts and shareholder accounts dwarf anything we have seen in the past. Obviously, a
decision by a relatively small fraction of these holders to sell all or part of their shares would
throw the market into a further sharp downturn.

Second, we find it astounding that the number of funds and shareholder accounts have actually
risen substantially over the past two and a half years. Some observers believe that this
reluctance to sell indicates that investors are acting differently than in past boom-bust cycles
and that they will keep their money in stocks. We disagree. In our view investors have not been
frightened enough to sell since the long secular bull market from 1982 through 2000 rewarded
investors who held on and bought the dips. In addition some analysts have estimated from past
monthly fund inflows that investors still have profits of about $150 billion now, down from a
peak of $800 billion.

We sense, however, that investors were becoming exceedingly fearful during the June-July
market decline, and were on the verge of throwing in the towel. We believe that as the next
market downleg puts the average fund holder below the breakeven point, panic selling is a
strong possibility. All past bear markets have ended only after investors disgorged stocks"en
masse", and we see no reason why this time will be an exception. In the end fear overwhelms
all other factors, and the need for a good night's sleep takes precedence over everything else.

Bild zu"Mutual Fund Net Purchase & Redemptions" pdf

Gruss
Cosa