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 done just keeping the 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: 219.6%. That's the total cumulative return of T2 Partners over the same period. Now that's more like it: 11% per year, turning $10,000 into $32,000, more than a triple.

Buy and hold may be dead, but investing in T2 sure isn't!

T2 Partners? Who dat?
T2 Partners is a small fund run by Whitney Tilson, a guy I've had the great fortune of meeting a few times. Tilson and his team are 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.

You read that right, companies in bankruptcy. In fact, one of Tilson's bankrupt investments was up almost 800% last year. Overall, T2's portfolio was up 40% in 2009, clobbering the market.

It's easy to see why I've made it a personal requirement to check in regularly to see what Tilson has been up to. Here's a snapshot of T2's top 10 holdings at year's end 2009:

Position

Holding

2009 Performance

1

General Growth Properties

796.1%

2

Berkshire Hathaway (NYSE: BRK-B)

2.7%

3

Iridium (Nasdaq: IRDM) / Iridium Warrants

(10.8%) / 1,300%

4

Microsoft (Nasdaq: MSFT)

56.8%

5

American Express

118.4%

6

Huntsman (NYSE: HUN)

228.2%

7

Pfizer (NYSE: PFE)

2.7%

8

dELia*s

(15.0%)

9

Sears Canada

35.3%

10

Yahoo! (Nasdaq: YHOO)

37.5%

Sure, T2 owns a nice slug of Berkshire Hathaway, as well as several other well-known blue chip names such as Microsoft, American Express, and Pfizer. Hardly revolutionary.

But nestled at the top of that list is General Growth Properties, a major commercial-property owner that was forced into bankruptcy last year. Tilson and his team made a mint shorting General Growth when it traded in the $40s a couple of years ago. Then, in a classic Tilson move, T2 actually started buying the stock when the company was in the throes of bankruptcy and trading for less than $1. Tilson believed the liquidation value of the company's assets was worth far more than its post-bankruptcy debt obligations.

As is usually the case, he was proven right when General Growth received a bid from Simon Property Group (NYSE: SPG) for as much as $9 per share. Wouldn't you like to make an investment for less than $1, then turn around and sell it for $9 or more a year later? I sure would.

Also in Tilson's top 10 is Huntsman, a Utah-based chemical company that was left for dead by the market last year after a failed buyout attempt and a severe drop-off in its business. But Huntsman won a few major settlements from its previous suitors, took a slew of costs out of its businesses, paid down and renegotiated part of its debt, and re-emerged a much stronger company. For patient investors like Tilson, who are willing to dig deep and stick their nose in places other investors won't dare, this is how the home runs are made.

Investing the T2 Way
So here's the rub. Most of us can't invest directly alongside Tilson. We don't have $1 million, T2's minimum investment requirement, lying around. And keeping up with Tilson's moves is nearly impossible because, like most hedge funds, he's only required to disclose his positions once a quarter. Even then, there's a 45-day reporting lag. That might as well be an eternity when you're trying to pounce on some of those lucrative special situations Tilson and his team are hunting for.

Still, it's possible to uncover the General Growths and Huntsmans of the world without Tilson's help. Start by screening for stocks that have lost more than 75% of their value over the past 12 months. The market hates these stocks, and probably for good reason: They're often teetering on the edge of bankruptcy.

Once you've put together your list, it's time to don your best Sherlock Holmes deerstalker, grab a magnifying glass (and a pipe if you're so inclined), and start working your way through their SEC filings. If you're diligent, and a bit lucky, you may find a situation where the business and its balance sheet are in better shape than the market is giving it credit for. If you invest before the market gets a clue, you'll be rewarded big time.

If you're not Sherlock Holmes, or don't have the time to wade through hundreds of pages of SEC filings, check out our new Special Opportunities service. Tom Jacobs and his team at Fool HQ are busy looking for the things most investors aren't seeing. If you'd like to learn more about Tom's approach to special situations investing, just enter your email address in the box below.

Matthew Argersinger doesn't own any of the stocks mentioned. American Express, Berkshire Hathaway, Microsoft, and Pfizer are Motley Fool Inside Value picks. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.