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1999 was one of our best years from a buying perspective. . . . History has proven that over time stock prices, although volatile in the short-term, will converge with intrinsic business value.” Or as FPA Capital put it:

“We strongly believe that the value style of investing is not dead, [merely] in a state of hibernation. ...The last two years have been particularly difficult. . . .” The performance test The funds knew their model, and they were staying with it. And they were soon to be vindicated. The five years 1999-2003, one of the most volatile in history, make a fine test. Even after bottoming out in 2002 and racking up a substantial rebound in 2003, the S&P 500 index showed negative average annual returns of 0.57%.24 If the stock market were the random walk described by academics, one would expect that for our ten funds it would be a roll of the dice, a 50-50 outcome, with perhaps five performing better than the index and the other five worse. On average, they should have done about the same as the index, except of course for the drag on performance of the funds’ sometimes significant management fees.

But I found some things that pure chance, a random walk, cannot explain. The ten funds all beat the index, not just as a group, but each and every one of them did so. And on average, they beat the index by a stunning amount, what economists like to call a five-sigma event, meaning a statistical marvel that pure chance cannot explain. (For the lay reader, a perfect game in baseball is a random and rare event. Two such games back-to-back would be a freak-–an occasion so rare it is outside the bounds of mathematical probability.) The ten funds showed positive average annual returns for those five years of 10.80%, or eleven percentage points per year better than the index. Not quite ten perfect games, but pretty close.

As one might expect, the average annual returns for the ten funds varied considerably, but even the least successful outperformed the index, and by a significant margin. The five-year 1999-2003 average annual returns were as follows:


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