2008 was our worst year. As fear and gloom spread, individual investors fled the stock market. Good earnings, successful products, companies with great balance sheets, proven track records and experienced management didn’t matter. In the previous sharp declines of the last 10 years, we would benefit from these market swoons as our low risk value stocks would bound back first. Our selection of stocks with low betas or zero correlation to the market would result on us being up in numerous quarters when market indices were down.

In 2001-2002, ZPR Fundamental Small Cap Value portfolios made spectacular returns when some highly respected value managers were having hard times and the rest of the market was losing money. As recently as the second quarter of 2006, we again showed the ability to go against the market declines by scoring 6.06% up while the Russell 2000 was down -5.03% and the S&P500 also was down.

2008 was different. Correlations suddenly converged to one and diversification didn’t work. While we avoided bank stocks, foresaw the banking crisis, the housing bubble, the mortgage security disaster, the spectacular surge in oil and its plunge, the weak dollar and its resurgence, this did not help us to beat the market. Whenever we made a change in our portfolio thinking the selloff was overdone, it got worse. Global diversification didn’t help either as most markets went down even more than the US markets. It was a three standard deviation event – the worst stock market in 80 years.

We encourage you to read our GRAPES Theory of Stock Prices that establishes the link between earnings, stock prices, and asset values which should be the basis for all investments.