Probably like most of you, I began investing before I was ready. It was 17 years ago, and I was fresh out of college. I bought a few no-load funds, then started to watch a bit too much CNBC.
I got courageous. Instead of feeding the funds with subsequent investments, I earmarked new money into individual stocks.
Back then, you didn't want to see my brokerage statement -- much less my Schedule D. I lacked the discipline and the due diligence commitment to make stock buying profitable, even in the early 1990s, when everyone was making money. The only thing quicker than my trigger finger on the buys was my trigger finger on the sells. I was impatient, and it cost me. I even lost money on Amgen (Nasdaq: AMGN) during the biotech boom!
A few months into my speculative trading, it dawned on me that I was losing to more than just the market. I was also losing to the same funds that I had initially purchased -- and then neglected.
I wasn't a smart investor. I was a cocky speculator. Something had to change.
If I only had a brain
Until I proved myself a worthy investor, I decided to scale back on my trading. It worked. I educated myself -- the right way -- and then rekindled a more lasting relationship with the market.
Gradually, I put more faith into my own stock-picking skills, rather than the skills of individual fund managers.
A funny thing has happened in recent years, though: I'm attracted to mutual funds again. When I come across themes and strategies that I admire but am hard-pressed to duplicate, I have no problem becoming a fund buyer again.
It's not about nostalgia. It's about rebalancing my portfolio the right way.
Try these funds
Let's examine three of the funds that have made me a believer again. I don't own all of them now, but I have owned them at some point in the past.
Merger Fund (MERFX) specializes in milking the premium out of buyout deals. When a stock announces a deal to be acquired, it often trades at a discount to the final selling price because it typically takes months for a deal to clear. There is also the risk that a merger comes undone. Merger Fund plays the difference, buying the acquired company. If it's a stock deal, the fund may also short the appropriate number of shares of the acquiring company to offset the long position.
Arbitrage isn't an easy game to play for retail investors on a small budget. It can also be dangerous -- a deal could very well blow up in your face. Merger Fund offsets the risk by buying into dozens of announced buyouts. It also analyzes the chances of the deal going through. For instance, Merger didn't nibble when Sirius Satellite Radio (Nasdaq: SIRI) and XM Satellite Radio (Nasdaq: XMSR) announced their hookup in February. The fund's largest holdings currently include Harrah's (NYSE: HET) and Sierra Health (NYSE: SIE).
Gateway (GATEX) buys a basket of stocks, then sells covered calls to lock in gains. That limits the upside whenever a major holding like Microsoft (Nasdaq: MSFT) or Pfizer (NYSE: PFE) takes off, but the fund produces some of the best risk-adjusted returns in the business. Plus, it comes with just a 0.95% expense ratio.
Oakmark International Small Cap I (OAKEX) is the one I still own. It's closed to new investors, unfortunately. Since my overseas investments tend to be in growth, I balance that with the seasoned value hounds at Oakmark. I can't complain. The fund's annualized returns have averaged 26% over the past five years.
The amazing thing about Oakmark International Small Cap is that it has achieved heady returns without chasing the momentum players into the hottest of emerging markets. Nearly two-thirds of its holdings are based in the more developed nations of Europe.
Foolish final thoughts
In short, time and hard knocks have taught me that I can't take stocks for gospel or funds for granted. The best portfolio is one that takes the best of both worlds, marrying them into a creamy blissful concoction of chocolate and peanut butter goodness. I wasn't ready to invest 17 years ago. I am now.
If you're ready to rekindle your relationship with mutual funds, try
Champion Funds
for free over the next 30 days. The Oakmark fund is closed to new money, but you will find one recommendation run by the same management company that is still open for your investment. Click here to get started.
Longtime Fool contributor Rick Munarriz does not own shares in any company mentioned in this story, beyond the Oakmark fund. Microsoft and Pfizer are Inside Value picks. The Fool has a disclosure policy.
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