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Expecting a Market Crash? Protect Yourself. Here's How.

9.9%. That's the total cumulative return of the S&P 500 from January 1999 to December 2009.

An investor who plunked down $10,000 in an S&P index fund in 1999 was sitting on just $10,990 11 years later. That's a measly annualized return of 0.9%, far short of inflation, and worse than you would have gotten from just keeping your money stuffed in a savings account.

Let's call it what it is: 11 years of straight-up market misery. Kind of makes you think buy and hold really is dead after all.

Then there's this number: 158.2%.

That's the net cumulative return of T2 Partners over the same period. That works out to 9% per year, turning $10,000 into $26,000.

How'd they do it?
T2 Partners is a small fund run by Whitney Tilson and Glenn Tongue, hard-nosed value hunters with a proven knack for finding investment opportunities where very few are willing to tread. We're talking special situations, spinoffs, stock warrants, and even companies in bankruptcy.

Overall, T2's portfolio was up 31.9% in 2009, clobbering the market. Tilson and gang are at it again in 2010. Through September, T2 is up 14.1% versus just a 3.9% rise for the S&P 500.

For T2, it's a simple formula. Tilson and team always keep at least 20% of T2's portfolio short. The fact that most stocks underperform a diversified index over time makes that a prudent strategy. But it also makes a lot of sense in times when even the best stocks take it on the chin. By betting against a slew of bad performers, T2 was able to stay afloat back in 2008 when most portfolios and mutual funds sank to the bottom.

Investing the T2 way
Most of us are pretty anxious about the stock market right now. Do we go higher from here, or do we crash back to those ugly March 2009 lows? What if the next 10 years are just as bad for the stock market as the last 10? What does that mean for our financial futures, our standard of living, our retirement plans?

The great thing about the long-short approach is that we don't necessarily have to worry about the general direction of the stock market. Just like Tilson and team, we can score big returns in any market, as long as we're willing to dedicate a good chunk of our portfolio to short positions. And best of all, you don't need to invest in a hedge fund like T2 to do it.

Later this month, The Motley Fool will unveil Motley Fool Alpha, a new investment service that seeks to bridge the gap between traditional stock newsletters and the real world of hedge fund investing. John Del Vecchio and I will be heading up this venture, drawing upon our years of experience in the hedge fund world. Motley Fool Alpha will play offense AND defense -- investing opportunistically in both long and short positions, with the singular goal of compounding our capital at 15%-plus over time.

Why Motley Fool Alpha?
The hedge funds where John and I made our names were incredibly profitable for their investors: for example, my tenure at Centaur Capital from October 2003 to December 2009 produced an annualized gain of 15.4%, net of all fees. That's against a virtually flat return for the S&P 500 over that same timeframe.

But funds like these are normally only available to accredited investors with a net worth of at least $1.5 million. We wanted to provide those kinds of life-changing returns to those who may not yet be accredited and/or just prefer to manage your investments yourselves. In Motley Fool Alpha, John and I will be managing a real-money portfolio consisting of our actual capital, and you'll have the opportunity to replicate our portfolio, trade for trade, in your own account.

Play offense AND defense
The Motley Fool Alpha investing approach blends aggressive opportunism with an equal emphasis on sleeping well at night. You'll see us make concentrated bets, but with a careful eye to overall portfolio exposure. You'll see us emphasize classical measures of value such as dividends and free cash flow yields, but with the occasional willingness to engage in a bit of intelligent speculation. At times we'll have the look of dyed-in-the-wool value investors, while at other times we may speak the language of market technicians. Our philosophy may defy traditional labels, and yet there is a consistency to our approach: seeking opportunities that have significantly more upside than downside.

Some might call what we do a trader's version of value investing. Our decision-making framework is grounded in fundamental business analysis and valuation, but we're not oblivious to fear, greed, and market momentum. In balancing these long- and short-term forces, our aim is to think long-term but act short-term: have a long-term mind-set in how we think about businesses, the economy, and our investment results -- but with a short-term, opportunistic willingness to capitalize on market volatility by trading around positions and reshuffling our portfolio based on changing opportunities and risks.

Our approach is aimed at the goal of defending and growing capital prudently over time. Our overall goal is to achieve portfolio returns of 15% annualized, measured over rolling three-year periods, while resisting significant losses.

Sound good? It does to me, too, so much so that I will be putting nearly my entire net worth into the portfolio. John will be investing, too. A small group of investors will be invited to join us. If you would like to learn more as soon as details are available, click here.

Matthew Richey is excited to be back at The Motley Fool, teaming up with John Del Vecchio on Motley Fool Alpha. Alpha senior analyst Matthew Argersinger contributed to this article, which was adapted from a separate article titled "Lost Decade for Stocks? Not If You're Long-Short" that was published Sept. 9, 2010.

Read/Post Comments (18) | Recommend This Article (72)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 16, 2010, at 1:08 AM, nofoolno2 wrote:

    So, a total reversal of your investing "philosophy"?

    Its a better idea, but now, I guess we will have to pay for this too? Im not impressed...

  • Report this Comment On October 22, 2010, at 1:37 PM, Ladylaw2 wrote:

    It sounds intriguing - but I would prefer it in a Mutual Fund so I don't have to make the trades myself.

  • Report this Comment On October 22, 2010, at 1:56 PM, stansmith1 wrote:

    Yes, I too like the idea of a Mutual Fund to do this, maybe MF should start one - then i can continue with my day job!


  • Report this Comment On October 22, 2010, at 4:19 PM, JZeigler wrote:

    I am for a Mutual fund too. I don't want to do the trades and watch the market all the time. Low cost of-course!!!

  • Report this Comment On October 22, 2010, at 6:44 PM, dyadco wrote:

    Why I left TMF: too many new products all supposedly looking at different ways of winning in the market.....and all at a cost.

    Get back to basics guys.

    The Million Dollar Portfolio was the last straw for me whan you said "we're putting $1 million of our money...", no, in fact it was subscribers money.

    The world has changed. Most consumers want simplicity, not complexity. Look at the comments above, so many are saying they'll just go with a mutual fund. Doesn't that tell you?

  • Report this Comment On October 22, 2010, at 6:54 PM, mikecart1 wrote:

    I don't favor these articles that is nothing but data mining to produce a known result.

    We need more articles about the future and less about the past. If there was a hurricane by luck every 3rd week in the fall 8 of 10 years, that does not mean we should run away after the 3rd week of fall for this year. Nor does that mean the other 8 years are related.

  • Report this Comment On October 23, 2010, at 9:34 AM, justsomedumbguy wrote:

    I look at all of your new endeavors and come close to closing the deal, but I just can't sign the check. The comments above are pretty much why I am still waiting for somewhere to put my money. I'm just not feeling it.

  • Report this Comment On October 23, 2010, at 1:52 PM, msnovi wrote:

    No offense, but TMF appears to be goofy, special ops for one thing then recs on all others. Right hand doesnt appear to know what left is doing. TMF appears to be just another buy sell site. Getting out going back to what I know, and works. Me.

  • Report this Comment On October 23, 2010, at 11:55 PM, CCAcowboy wrote:

    Personally, I'm happy to see this new direction. Being long in "top dogs" and "first movers" is great, but I can't ignore that the Dow and the S&P 500 are up in a downward trending volume. There are "top dogs" on the short side, too. I remember Stone & Webster had a short seller that plagued them for years. It finally payed off when they stopped trading at 93 cents down from $50. There are quite a few more like that out there. Sifting the financials is time consuming. I'm happy to pay reliable, experienced people to do that. That's what makes the economy run.

  • Report this Comment On October 24, 2010, at 5:21 AM, stefaith wrote:

    I already subscribe to 3 TMF services, Global Gains, Inside Value and Hidden Gems. If I were to subscribe to another, it would be something like this, but I'm not willing to pay the price you asked for the short service you previously advertised.

    How much is this one going to cost?

    It annoys me when you bombard me with sequential e-mails descibing some wonderful service you are about to launch, but never mention the price. It makes me think you take me for a fool (small f).

  • Report this Comment On October 24, 2010, at 11:06 AM, jrice wrote:

    <...prefer it in a Mutual Fund so I don't have to make the trades myself...>

    Me four.

  • Report this Comment On October 25, 2010, at 3:20 PM, budharlan wrote:


  • Report this Comment On October 27, 2010, at 12:35 AM, Notfooled1 wrote:

    From what I have seen, the overall record of Motley Fool "experts" has been inferior to a dart board approach. Now and again, the Fools hit a big one, but when they recommend so many stocks in so many (overpaid) services, they have to hit some big ones. Even a stopped clock is correct twice a day.

  • Report this Comment On October 29, 2010, at 11:14 AM, faustrl wrote:

    A loud and hearty to AMEN to all of the above. It is that sort of thinking makes more sense to me than all of the special pleading and plans the top dog Fools bombard me with to fire my desires for seemingly easy money.

    Thanks to all of the responders above for telling it the way I feel it is!!

    R. Faust [I have forgotten my use name. Please post anyway]

  • Report this Comment On October 29, 2010, at 3:47 PM, kuzumel wrote:

    I did a little digging into long/short management and realized that my combination of the stocks and option services pretty much cover the same area. True, they're not coordinated, as the Alpha service might be. But you still look at the same data set, if you check up on the stock before you execute.

  • Report this Comment On November 08, 2010, at 12:18 AM, 1920wallstreet wrote:

    Buy this letter;Buy that letter,Why not talk about the market trends ,and not aways market your letters you are selling.Read what the MF customers are telling you.

  • Report this Comment On December 01, 2011, at 1:46 AM, etihwttam wrote:

    The above comments are so right on the money. Something drasticly changed at the Fool when it became "Fool HQ" and all that other glossy hype. They used to be down to earth and real. Now, they seem to hide the most relevant details (like price). The old Fool was adamantly opposed to that kind of evasiveness. What a shame (on us for being taken in). What we need to do is create a BBB-type message board that gives the real deal about the Fool: details like what happened on the *other* side of the score card with picks like First Marblehead (Bill Mann: "oops the black swan swam by, my bad") or Global Gains pcks ("sorry about those Chinese recs that cooked their books. who knew?"). Time for all the information to get out, not just the 25-minute self-congratulatory marketing spin videos.

  • Report this Comment On January 15, 2014, at 11:30 PM, MatiasR wrote:

    Reading this 3 years later, after the Alpha portfolio unwinding, is extremely funny.

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