JULY 29, 1999
Over the last few months, three things happened that have left me—once again—shaking my head in amazement at how predictable people are in the face of the market and its short-term unpredictability. Each of these events illustrates the same point I have always preached: The patient, disciplined use of time-tested investment strategies eventually wins out.

#1: Cornerstone Value Ignites
The first event was the reemergence of the Cornerstone Value Fund after a period of somnolent performance. In my book, What Works on Wall Street, the Cornerstone Value Strategy emerged as a top performing strategy over the last 47 years on a risk-adjusted basis. (This means that when you take volatility into account, it provided the greatest return.)

Between December 31, 1951 and December 31, 1998*, the Cornerstone Value Strategy compounded at 15.24% while the S&P 500 compounded at 12.89%. But what a difference that 2.35% can make: $10,000 invested on December 31, 1951 in the Cornerstone Value Strategy would have been worth $7.86 million at the close of 1998, whereas the same amount invested in the S&P 500 would have been worth $2.98 million.

But to many folks those facts probably meant very little on April 1,1999. If, like most investors, they only looked at the strategy's recent performance, they'd easily convince themselves that while Cornerstone Value (and its core holdings of big, cyclical, high yielding stocks) used to be a good way to invest, it wasn't any more.

Heck, anyone with a brainwave pattern knew that the only place to invest your money was in the big growth names that dominated the S&P 500! For the shortsighted, investing in the late 1990s was as easy as 1-2-3 and maybe 4: buy AOL, Microsoft, Amazon.com and perhaps Pfizer, and watch the money roll in.

The drumbeat in the financial press and all the short-term evidence indicated that Cornerstone Value's big-cap cyclical stocks would not come back. But come back they did: during the next quarter, the Cornerstone Value Fund gained 13.78%—nearly double the S&P 500's 7.04% gain and way ahead of the 18.39% loss suffered by the 4-stock AOL, Amazon.com, Microsoft and Pfizer portfolio. This shift nicely demonstrates how unpredictable the market can be, and how events that no one believes possible happen far more often than we think. It also reminds us how dangerous a short-term investment outlook can be.

I certainly didn't expect the Cornerstone Value Fund to perform so well in the second quarter of 1999. Frankly, I was feeling pretty gloomy watching our big-cap value names snore away while the high-flying growth stocks marched higher, day-in and day-out. Yet because I base my investment choices on decades and not days, I continued to have faith that, over time, the strategy would continue to work. I also knew that in any given year, the Cornerstone Value strategy's chance of beating the S&P 500 was just 55% in any one year period back to 1952—and trying to guess exactly when that would be was futile.

What a Strategy Indexer Should—and Shouldn't—Care About
As a Strategy Indexer, I'm not interested in how the strategy did in 1999—but where it is likely to bring me when I turn 65 in 2025. I firmly believe that the key to long-term success is to understand this, yet no one thinks that way. I have absolutely no idea what the Cornerstone Value Fund will do in the third or fourth quarter, and frankly, I don't care. But I have a very strong opinion that over the long-term, it's likely to perform like it has in the past. Obviously, past returns do not guarantee future performance. But you've got to use the fullness of time to inform your choices.

Use this turnaround to remember what you should focus on. No one forecasted Cornerstone Value's surprising turn around—because it was impossible to forecast. That's why patient, disciplined investing based on historical evidence has worked so well—in the long-run, facts overpower emotions, but only if you let them.

#2: Cornerstone Growth Revives
The second thing that happened to reinforce my belief in the importance of long-term investing was the turn around of the small-cap stocks that dominate our Cornerstone Growth Fund. Many investors ran for the hills after Cornerstone Growth's swoon last summer, so I decided to do a little research. I looked at what would happen if you used either a double-digit one-month decline or a negative one-year return as a buy—rather than a sell—signal. Not surprisingly, I found that history suggests that buying—not selling—Cornerstone Growth after the swoon was the thing to do.

In my October 5, 1998 commentary I looked at the strategy's five worst performing months, and what happened over the following 12 months. I found that if you bought Cornerstone Growth after one of these meltdowns, 12 months later your average gain would have been 46.20%.

History was suggesting that both the end of August 1998 and the selling panic of early October 1998 were buying opportunities—and indeed they were. Since August 31, 1998, the Cornerstone Growth Fund has gained 38.21%, and since October 5, 1998 (the date I posted the results of my study), it has gained 47.21% through July 26, 1999.

#3: Clone Portfolios trounce their Human Competitors
The third thing to reinforce my belief in strategic, long-term investing emerged last week as I was updating some of the models from my 1994 book, Invest Like the Best. In the book, I showed readers how to clone the portfolios of their favorite money managers, and I included clone portfolios for a number of well-known mutual fund managers in the years 1986 through 1992.

The best-performing manager covered in the book used an aggressive growth style. I dubbed his clone the Momentum Growth Model, since it relied heavily on momentum in earnings growth and stock price. During the seven years covered in the book, the manager earned a compound return of 22.59% per year, whereas the clone portfolio had a compound return of 35.10%. (I believe the clone outperformed the manager for two reasons: the portfolio consisted of just ten stocks and, more importantly, it never deviated from its underlying strategy.)

What's really interesting is what has happened in the years since the book was published. Now, if a clone portfolio is a good one, it seems to me that it should outperform its human counterpart by a significant amount, even if the manager's style is out of favor. The disciplined use of the manager's strategy should add value, regardless of how that style is faring.

Well, that's exactly what happened. The momentum growth manager's once hot performance cooled in a market dominated by just a handful of big-cap growth names, and his fund compounded at 13.57% from December 31, 1992 through July 23, 1999. The clone portfolio is another matter, however. Over the same period, the Momentum Growth Model compounded at 20.85%, indicating once again to me that an unemotional, disciplined approach can truly add value over the longer term.

Unpredictable Markets, Predictable Humans
The performance of our Cornerstone Funds and the Momentum Growth Model are telling us that while markets aren't predictable over the short-term, human behavior is. You can safely predict when investors will be wildly bullish on big growth stocks: after big growth stocks have run up!

It's close to impossible to predict what the market will do in any given month or quarter but it's pretty easy to predict how people will react to market swings. If times are bad and the market goes down, people sell. When times are good and a strategy is doing great, people buy. They dramatically overweight the most recent past to the detriment of the big picture, extrapolating recent market history forever into the future.

And since the market has a feedback loop, you can count on the media to focus on the stocks and mutual funds that everyone is wildly bullish about, write up their recent successes and invent all sorts of reasons why it's bound to continue. People who ignore history and refuse to study how a strategy performs over a variety of market cycles will be forever caught in this loop.

The Ace in the Hole
Strategic investors, on the other hand, recognize the dangers of this market myopia and change their focus to when they need the money they're investing. That's our ace in the hole.

I'll be 65 in 26 years. I realize that between now and then, there will be bull and bear markets, fads and follies, a million more story stocks and crises I can't even imagine. I also realize that if I want to reach my goals, I've got to assume the laws of economics will continue to hold true, and the strategies I've chosen will get me to my goals. But I've got to let them work, and avoid the temptation of trying to second-guess them.

It's nice to see our strategies and clone portfolios working in real time. But buying Cornerstone Growth after the plunge in August, or Cornerstone Value after several lackluster years, takes real guts. A review of Cornerstone Growth reveals many other months and quarters where it was hit hard, only to rebound strongly afterwards. Again, if we let history guide us, we gain a perspective that others lack. Studying history shows us that perception is not reality, and that sometimes, the fear of a fall is worse than the fall itself.

The Good News
All three of these examples lead us to the same conclusion. If you're honest with yourself, you'll see the folly of trying to out guess the market. You'll see it's a fool's game to try to move from fund to fund based on what's hot at the moment. You'll realize that over the short-term anything can happen, and that to extrapolate the short-term into the future leads you down many blind alleys.

You can also see from these examples that over the longer term, Strategy Indexing has worked—sometimes when you're just about to give up hope. Our constant challenge is to keep the faith. But think how happy we'll be when we need our savings. Patience and long-term focus will pay off, and we remain convinced that Strategy Indexing will be the revenge of the patient investor.

*These figures represent past performance of the Cornerstone Value Strategy, but not the Cornerstone Value Fund, applied retroactively, and should not be considered indicative of future results. The performance of the Strategy shown is a hypothetical example of the performance of the Strategy found in a backtest. Performance of the Cornerstone Value Strategy does not reflect advisory fees, commissions, expenses or taxes that will be borne by the Cornerstone Value Fund. Actual results will differ from the Strategy because of such fees and costs.

For the Cornerstone Growth Fund, the average annual return since inception and the one-year return for the period ending June 30, 1999 are 15.63% and -5.00%, respectively. For the Cornerstone Value Fund, the average annual return since inception and the one-year return for the period ending June 30, 1999 are 14.21% and 16.25%, respectively. Share value and returns fluctuate and investors may have a gain or loss when shares are redeemed.

Investors should keep in mind that there is no certainty that any investment or strategy will be profitable or successful in achieving investment objectives. Past performance is not an indication of future results.