It's officially fall now, but I've been playing catch-up with my summer reading list with Blink, the most recent book by The Tipping Point author Malcolm Gladwell. It's a terrific read, a study of the ways our unconscious mind makes snap decisions that often turn out to be better than those we agonize over for eons.
Thin is in
One of the main ideas Gladwell works with in the book is "thin-slicing" -- extrapolating meaningful conclusions from a compact set of data. Properly used, it's a tool that can serve investors remarkably well, a no-muss, no-fuss way of doing an end-run around distractions that, all too often, simply cloud our judgment.
That's particularly true when it comes to investing in mutual funds. Fund companies love to market their products on the basis of past performance and absolute returns, for example. But as savvy types know, these data points can be smoke screens, eye-catching diversions that prevent you from focusing on what really matters.
What if, for example, I told you about a fund that specializes in high-quality large caps such as Microsoft (Nasdaq: MSFT ) , Time Warner (NYSE: TWX ) , and Wal-Mart (NYSE: WMT ) and that, for the 15 years that ended with August, this fund cranked out a total return of more than 300%. Beyond that, what if I put dollar-and-cents figures to those numbers and explained that, if you'd invested $10,000 in the fund at the beginning of that 15-year period, you'd now be sitting on a nest egg of more than $40,000.
Impressive, no?
Well, actually ...
Not so much, it turns out. Those details might look good in a glossy fund company brochure, but unless your aim is to divert prospective investors from asking the right questions, they're not especially relevant.
Indeed, a fund that fits the profile outlined above has actually underperformed the broader market as measured by the S&P 500. It's also lagged dirt-cheap index trackers like the SPDRs (AMEX: SPY ) exchange-traded fund (ETF) and Vanguard 500 Index (FUND: VFINX ) , which, with the likes of ExxonMobil (NYSE: XOM ) and General Electric (NYSE: GE ) as recent top holdings, target the same area of the market as our mystery fund.
How to proceed
The best way to proceed if you want to make market-beating investment decisions is to thin-slice the right data, not merely the information the fund company has oh-so-conveniently placed in your research path. On that front, I'd encourage you to zero in on expenses, management team tenure, and the fund's performance on the current team's watch.
That criteria, not coincidentally, is at the top of my hit list as I cherry-pick one fund a month for the Fool's Champion Funds investment service. And while there are certainly other numbers to crunch (alpha and beta, for example) and strategies to assess (does the fund fare best in up markets or down?), you'll go a long way toward finding the best bets by focusing on the three metrics I mentioned above.
The Foolish bottom line
If you'd like to learn how to put it all together, you might also consider snagging a 100% risk-free guest pass to Champion Funds. The service is dedicated to helping you beat the market while sleeping peacefully. And in addition to our monthly recommendations, we aim to help you become a smarter investor with news and insight you can use when, say, it's time to make (or change) your 401(k) contribution choices.
Interested? Excellent. Click here to get it started. Fund investing isn't as easy as blinking your eyes, of course. But with Champion Funds as a crib sheet, you'll be equipped to make smarter choices in a snap.
Shannon Zimmerman runs point on the Fool's
Champion Funds
newsletter service, and at the time of publication didn't own any of the securities mentioned above. Microsoft and Wal-Mart are Inside Value picks. Time Warner is a Stock Advisor pick. You can check out the Fool's strict disclosure policy by clicking right here.
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