Value Fund

Investors Intelligence, which polls Street sentiment, reported recently that 60% felt bullish and were convinced the economy is just right. The run has lulled investors into a false sense of security. After all, Goldilocks was no saint. She broke into someone else's cottage, stole their porridge and busted Baby Bear's chair. As a contrarian, I have always related better to the bears. They are the ones who recognized something was not quite right. That is how I feel as we start the new year.

A correction is inevitable. I'm anticipating at least a 10% market drop sometime this year. Why? Earnings expectations are overly optimistic. After increasing 20% in 2005 and 15% last year, Wall Street is still banking on 10% earnings growth for 2007, double the historical average. But economic expansion is projected to slow to 2.5% in 2007, down from 3.3% in 2006. The smart money knows it is not possible for corporate profits to outpace the underlying economy for very long.

Put some money in this loser. Like every first-rate manager, Muhlenkamp has a bad year once in a while. Just ask Bill Miller, whose streak of beating the S&P ended at 15 years in 2006 when his Legg Mason Value Trust returned just 6%.

When bad years happen to good managers, it's often time to add money to their funds. They may not bounce back immediately, but so long as their investment strategies remain sound and their funds haven't become bloated with assets, bounce back they will -- and you'll be glad you signed on for the ride.

Bill Miller wants revenge and I believe he's going to get it. It's an incredible feat to beat the S&P 500 for 14 straight years in a row (averaging an incredible 16.6% per year), particularly during the greatest bull market ever. But this year Miller missed the market. James Altucher believes that we're going to see a strong comeback in Bill Miller's top holdings in 2007.

Three of Whitman’s equity investments during the quarter – Wharf Common, Cheung Kong Common, and Wheelock Common – are in extremely well-financed, Hong Kong-based companies, involved in actively managed income producing real estate as well as other activities. Each issue was acquired at what seems to be a meaningful discount from Net Asset Value (“NAV”).

Third Avenue buys into its private equity investments at prices that represent very substantial discounts from readily ascertainable NAVs. Private Equity LPs obtain control by paying premiums over OPMI market prices. Private Equity LPs most often negotiate deals. Third Avenue pays prices in the open market which are way, way below prices that are paid typically in negotiated deals.

The fact that expectations are usually priced in a stock is a simple truth that most investors tend to neglect. That helps Warren Koontz, the manager of the Loomis Sayles Value Fund, to find undiscovered value in areas not typical for value managers. With a portfolio that’s constructed on the basis of individual ideas, and a time horizon of two to three years, the fund benefits from the volatility created by the short-term mentality of the market.