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Stock Strategist

Where Have All the Great Investors Gone?

2008 exposed weaknesses in analysis, not philosophy.

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Each quarter, Morningstar stock analysts review the shareholder letters and holdings of a select group of fund managers in an attempt to learn more about their stock selection process. Unfortunately, most of the things we learned in 2008 came from fund managers' mistakes, as the Morningstar U.S. Market Index declined nearly 40%. In the words of the managers at  Tweedy, Browne (TWEBX), "there was nowhere to hide in the public equity markets in 2008, nor for that matter in virtually any other asset class." Warren Buffett's  Berkshire Hathaway (BRK.B) suffered its worst year ever, with its book value falling by 9.6%. Some of the investors we've been following for years fared even worse. Bill Miller's market-beating streak at  Legg Mason Value (LMVTX) is now long gone, replaced with a three-year average annual loss of 27%. Miller was not alone: As the financial system came grinding to a halt, value traps turned deadly for many well-regarded investors. When we examined fund holdings at this time last year, companies like  AIG (AIG) and Washington Mutual showed up on more than one fund manager's shopping list, only to lose essentially all of their value later in the year.

Considering the changes taking place in the market during the past year, we decided to revisit the list of managers we've been following. We sought not only stock-pickers with a record of beating the S&P 500 Index over the long run, but also those who consistently write informative and educational shareholder letters. After all, it's little use knowing what a manager owns without understanding the reason behind the purchase. We also looked for managers who follow a value-based investment strategy similar to our own, for the same reasons value investor Seth Klarman outlined in a 2007 speech:

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Jim Sinegal has a position in the following securities mentioned above: BRK.B, AIG. Find out about Morningstar’s editorial policies.