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Stock Strategist

All-Star Managers Report on the Rally

Our stock analysts' favorite managers remain true to their game.

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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. The past two years have been enlightening, to say the least, as we followed the managers from the beginning of the recession (and some well-publicized missteps) to the market depths reached in March and now on to stabilization and possibly the beginnings of recovery.

Managers Warn against Market-Timing
After the massive stock market rally that took place in the second quarter, some of the managers on our roster of favorites are probably justified in defending their decision to stay invested in the face of the deteriorating macroeconomic picture in 2007 and 2008, and despite the losses incurred in the interim.  Third Avenue Value's (TAVFX) Marty Whitman explained the reasoning behind his decision to remain invested, writing that "Fund Management cannot make sound investment decisions if it assumes that draconian general market declines are just around the corner," and casting a skeptical eye toward claims that such a thing can be done. According to him, "the sole reason why TAVF Management does not pay any attention to general market factors, is that we are no good at making such prognostications. We don't think anybody else--perhaps with the exception of a few geniuses who are unknown to us--is any good at it either."  Weitz Partners Value's (WPVLX) Wally Weitz agreed that market-timing is nearly always an exercise in futility, observing that "taking the extreme position of going to 100% cash in the fall of 2007, or even in the summer of 2008, would have saved us considerable grief. Unfortunately, though, if we had tried to get out of stocks every time we sensed stock market 'danger' over the past 39 years, we probably would have produced much lower returns and higher tax bills." Weitz also invokes Warren Buffett's statement that he "would not have been pleased if [his potential successor] had moved to cash" during this period. Fund managers also made their case for security analysis, or as Mario Gabelli of  Gabelli Asset (GABAX) called it, "Plain Old Stock Picking." According to the management team at  Mutual Shares (TESIX), "macroeconomic developments do matter, but not to the exclusion of company specifics, as seemed to be the case for much of 2008 and the first part of the year."

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