Mellody's Math: Stick to Your Values

The best way to look forward to the investment landscape of 2002 is to start by looking back.

Value investing was not always in vogue, yet history has proven that it is not just a passing fancy, but a tried and true investment philosophy that has withstood the test of time.

For the one-year period ended Dec. 31, 2001, the Russell 2000 Value Index, measuring the performance of smaller, value-oriented stocks, was up 14.02 percent. This double-digit return is even more impressive when compared to the performance of the overall market, as measured by the S&P 500 Index, which fell 11.89 percent.

After years of relative underperformance and a low profile on Wall Street, value investing has finally given its growth counterpart a run for its money.

History Tells the Tale

The story was drastically different two years ago. The beginning of 2000 marked the proliferation of dot-coms and IPOs were at an all-time high. Scads of investors had jumped ship from their mutual funds, perceiving professional management as an unnecessary albatross.

Combine this "show me the money" mentality with the year's unprecedented economic conditions — the stock market selling at all time highs and a bull run that outlived any other — and any true contrarian investor could tell you that investors were in for a jolt of reality.

Like hem lines and boy bands, stocks market darlings can have a short-lived time in the sun.

And then March of 2000 came in (and out) like a lion, knocking the so-called "new economy" phenoms back down to Earth, and rewarding patient value investors with positive returns for the first time in years.

And so it seems, with the new millennium came new stock market leadership — an about-face from 1999, when traditional value managers were practically annihilated by a "new economy" stock rally and publicly scorned for clinging to time-tested (derided as "old") investment principles.

Investor's Playground

Hindsight is 20/20, but dedicated value investors can look back at the market euphoria of the late 1990s and see where the dot-coms showed fundamental lacks — lack of earnings, lack of seasoned management, lack of providing a quality product or service.

These are basic requirements when selecting a stock for purchase, and they are also the tenets of value investing. So many investors scorned these "unnecessary details" as archaic methods of stock analysis, hardly applicable in our new tech-savvy markets.

A natural contrarian's confidence is heightened when they see such widespread like-mindedness. "If all children sit on one end of a seesaw because it's the end going up, it can't go up." In purchasing shares of companies that have been widely ignored by Wall Street investors, the patient investor has got a seat on the side of the seesaw that is ready to rise.

And rise it did in 2001. Value investors were rewarded for their patience and disciple, as undervalued stocks were insulated from the looming recession, rising unemployment and earnings disappointments.

Buy low — so simple in concept, so difficult in execution. Prices are low when demand is low. And demand is low when confidence is low. As such, despite the falling consumer confidence and a vacillating market, dedicated contrarian investors were not discouraged and recognized that times of dramatic market sell-offs are when value investors earn their pay.

Defining Value

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