Editor's note: Investing can feel like a game of chance. But you can put the odds in your favor... by changing your strategy when the game changes. That's exactly what Whitney Tilson, the editor of Stansberry's Investment Advisory, has done in his career. In this piece, which first appeared in the Whitney Tilson's Daily e-letter last November, he shares how he became a value investor... and explains why the market's next winners won't be what most folks expect.

When I launched my first hedge fund on January 1, 1999, big-cap "Nifty Fifty" stocks were all the rage. They had vastly outperformed in previous years.

I had bought a few of them, like AOL, Dell Technologies, Intel, and Microsoft. That year proved to be the last year of the Internet bubble's blow-off top... And fortunately, I still held them. I ended the year up 38.7% versus the S&P 500 Index's 21% gain.

Then, the bubble burst. By the time the market bottomed, the tech-heavy Nasdaq Composite Index had crashed nearly 80%.

I should have gotten incinerated. I had started as a late-'90s bull market "genius," riding popular tech stocks while ignoring valuations. But I saw the massive bubble in time... and sold them before they took me down.

To some extent, I was lucky. But I also created my own luck. I worked hard and became a learning machine, sucking up all of the knowledge and experience I could.

I changed my strategy because of that. And as I'll explain, it led me to a tailwind that's about to repeat today...

You can only gain experience two ways: by doing things yourself, which inevitably means making mistakes (of which I made plenty), or by learning from others. Trust me, the latter is preferable.

I was both lucky and smart in finding the right teachers, starting with my college buddy Bill Ackman.

I still remember a conversation we had in 1999. I was boasting about how well my fund was doing. When I mentioned AOL and Dell, Bill asked me to explain how I valued them and why I thought they were cheap.

I sputtered something about them being great companies that were growing rapidly. Bill said, "Yes, I understand that. But why do you think their stocks are undervalued?"

I had no answer (because there wasn't one). His questions made me rethink all of the high-flying tech stocks I owned.

I also owe a debt of gratitude to Warren Buffett and the late Charlie Munger. Bill had told me about them a few years earlier. Their teachings – especially their warnings about the Internet bubble – were slowly penetrating my thick skull.

At the same time, I was voraciously reading value-investing classics from the greats. And I remember how excited I was when I discovered that one of my idols, Joel Greenblatt, was teaching a course at Columbia Business School in the spring of 2000...

I showed up on the first day and sat quietly in the back of the class. When it was over, I approached Greenblatt to tell him I was a big fan and that I had just started my own little fund a year earlier. I asked if I could sit in for the semester. He frowned... "Well, I'm not supposed to do this," he said. "But if you sit in the back and don't say a word, I'll allow it." I never missed a class.

Learning from a brilliant, legendary value investor – at the exact time that the tech bubble was in its final blow-off phase – was transformative. It was the defining moment that caused me to shift away from my old, speculative ways.

Now, I didn't sell all of my tech stocks... even though I wish I had. But I did begin trimming them – replacing them with small-cap value stocks, which were trading at all-time-low absolute and relative valuations.

And I made an especially large and well-timed bet on my favorite stock, Buffett's firm Berkshire Hathaway (BRK-B)...

On Friday, March 10, 2000, the Nasdaq reached its peak. Berkshire and the other value stocks in my portfolio had been getting pounded for months. Every investor on Earth seemed to be selling them and plowing money into tech stocks.

Berkshire's A-class shares had traded between $55,000 and $70,000 for much of 1999. But in the first quarter of 2000, they kept drifting lower and lower... eventually hitting a multiyear low of $40,600 on that historic day in March.

Meanwhile, the company was doing fine. The stock was simply suffering from the money flowing out of value stocks.

I had no idea when it would end. But I said, "Screw it, I'm all in!" I called my broker and bought six Berkshire A-shares for $41,500 each, making the stock nearly 30% of my tiny fund.

My timing turned out to be perfect... The following Monday, the Nasdaq started to decline, and value stocks took off. Just three months later, I sold four A-shares at $60,300 – a 45% gain from where I had bought them in March.

This launched what turned out to be a decadelong winning streak, nearly tripling my investors' money in a flat market. That success was driven in part by blue chips – but also lots of smaller stocks like restaurant chains CKE Restaurants and Jack in the Box, mall operator General Growth Properties (now GGP), and HVAC company AAON.

I was riding a huge tailwind. I had built a portfolio with lots of cheap small-cap stocks... at a time when they were recovering from a period of historic undervaluation and outperforming their larger peers.

This brings me back to today... Right now, small-cap stocks are back to 2000-like valuations relative to large caps (represented by the S&P 500). Take a look at the chart below...

We're incredibly close to this ratio's 2000 baseline. Meanwhile, small caps – measured by the S&P 600 Index – trailed the broader market by a wide margin. Check it out...

As you can see, large caps outperformed massively from 1997 to 1999. Small caps took over in most of the following years through 2013. But in seven of the 10 years since then, large caps have again outperformed... And last year, large caps had their biggest year of outperformance in 25 years.

My takeaway from this is simple...

While I wouldn't dump my favorite large caps, I think true outperformance – not just this year, but for many years – is likely to come from smaller (and cheaper) stocks.

Don't count the "little guy" out just yet. This pattern is likely repeating, which means smaller stocks have plenty of room to run.

Regards,

Whitney Tilson

Editor's note: An unusual shift is coming to the stock market this year. And it might catch unprepared investors off guard. But with the help of Stansberry Research's latest strategy, you don't have to get left behind...

Yesterday, Whitney sat down to discuss one of the biggest breakthroughs in our company's history. He explained how this strategy has outperformed the market by up to 10-fold since going live behind the scenes at our company... And he demonstrated exactly how it can help investors in 2024. If you missed the event, don't worry... You can watch a replay right here.