The past decade has been a trying but an instructive one for investors: first the dot-com bubble burst between 2000 and 2002, then all the world's stock markets crashed in 2007 – 8. Almost all investors, regardless of their philosophies, were bloodied. Even many value investors, the most conservative and stable of the bunch, felt the force of the hurricane.
Until they realized how quickly their holdings were rebounding, value investors may have questioned whether their principles still applied.
During the bull markets of the early 21st century, Warren Buffett's Berkshire Hathaway, Inc., a holding company operated on value principles, was not the most stellar performer on the stock market and was the darling only of Berkshire's loyal shareholders. More than 30,000 enthusiastic followers show up at Berkshire's annual meeting each year to cheer Buffett on. They ended up on the victorious team. In 2009 Buffett's company turned in one of the best performances in its amazing 45-year history. The company's net worth increased by $21.8 billion and the per-share book value of its stock rose by 19.8 percent.
Another value investor, Seth Klarman, has outperformed the market consistently over a long period, without using leverage or short selling. During the past 25 years, his company, The Baupost Group, has generated an annual compound return of 20 percent and is ranked 49th in Alpha's hedge fund rankings. These and many more value investors have either preserved principal or triumphed in very difficult market conditions.
It is always healthy to check up on the validity of your own thinking. Considering the market breakdowns of the past decade, the discouragement many individual investors have suffered, and new federal laws, this is an excellent time to restudy Benjamin Graham's concepts of value investing and learn how to apply them to a whole range of new challenges.
It is time to look at how the principles work and how they can be changed or improved for a world that is technology oriented, virtually borderless, and moving at the speed of electrons.
Excerpted from The Triumph of Value Investing: Smart-Money Tactics for the Postrecession Era by Janet Lowe, by arrangement with Portfolio, a member of Penguin Group (USA), Inc. Copyright © Janet Lowe, 2010.