Even as he's caught square in the sights of this terrible market, noted money manager Richard Pzena exudes confidence -- despite big bets on Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Citigroup (NYSE: C) thus far looking nothing short of stupid.
If the problems surrounding Fannie, Freddie, and Citi "prove not to be fatal, as we suspect, then over the long term we're going to make a lot of money," Pzena says.
But Pzena likely agrees with the recent words of the famous Bill Nygren -- another manager lately wracked by underperformance. "We don't like how the stocks have recently performed," Nygren wrote to shareholders, "but we like the long-term positioning of the businesses in which we have invested."
That better be some good long-term positioning
Oakmark Select (OAKLX) is down 30% over the past year, substantially trailing the market. And it's been getting worse. Major holdings such as Time Warner (NYSE: TWX) just keep dropping and dropping.
But neither Pzena nor Nygren is wavering from the strategies that have made them wealthy.
They're not alone ...
Ron Muhlenkamp is another noted money manager mired in underperformance -- his Muhlenkamp Fund (MUHLX) has trailed the market over the past two years. Yet he, too, is confident. "We are now, once again, at the beginning of a business/investment cycle, giving us opportunities we haven't seen in six to seven years," he wrote earlier this month.
That's right: Amid all this turmoil, the generally staid Muhlenkamp is starting to get excited -- and he's been adding to his positions in IBM (NYSE: IBM) and Wesco (NYSE: WCC).
... but they are in the minority
Of course, few individual investors are taking advantage of these opportunities. According to data from the Investment Company Institute, outflows from U.S. stock mutual funds stand at more than $15 billion year-to-date.
So as stocks get cheaper, investors are ... selling.
Opposite Day was Dec. 22!
That doesn't make a lot of sense (we're taught to "buy low," after all), until you consider that investors are scared witless.
Whether it's because we're waiting for the other subprime shoe to drop, or for China to sell our dollars into oblivion, faith in the economy is at a 15-year low. Just 19% of respondents to a recent New York Times/CBS News poll said they thought the economy was "headed in the right direction."
These folks aren't imagining things, but they are letting short-term fears prevent them from making money in the stock market. As Pzena notes, "Shares don't trade at these valuations unless this kind of stuff is going on."
But the only way to make a lot of money is to be among the few willing to buy at these prices.
The more things change
We're among that few in our Motley Fool Hidden Gems small-cap investing service, and we're taking advantage of current volatility to recommend low-cost positions in some of our favorite long-term picks.
To see our top picks for new money now, click here to join Hidden Gems free for 30 days. There's no obligation to subscribe, but if you're not counting your gains 10 years from now, don't say Pzena didn't warn you.
This article was first published on Jan. 17, 2008. It has been updated.
Tim Hanson owns shares of Muhlenkamp but no other securities mentioned in this article. Muhlenkamp is a Champion Funds pick. Time Warner is a former Stock Advisor recommendation. The Fool's disclosure policy is a constant fiddler amid even the most dire of situations.
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