The Biggest Problem You Face When Investing

You're a smart investor. You buy stocks for less than they're worth and sell either when valuations become lofty or when a better opportunity arises. Right now, your watch list is probably full of companies like Borders Group (NYSE: BGP), Dell (Nasdaq: DELL), and WealthCare Health Plans (NYSE: WCG) -- all solid companies, all trading near 52-week lows.

And when you look for the best mutual funds -- whether for your 401(k) or to add some diversification to your stock portfolio -- you place utmost importance on your analysis of the fund manager.

Since we're on the same page
It's easy to run a quick screen and find impressive recent track records, then move into those funds. But as money manager Bill Miller put it:

In any case, the biggest problem that people have isn't selecting the right money managers. It's the way they change managers all the time in response to fluctuations of short-term performance.

Perhaps you bought into Peter Lynch's Fidelity Magellan (FMAGX) because he had "one up" on Wall Street. Maybe you recently sold your position in Bill Miller's Legg Mason Value Trust (LMVTX) because his 10-year annualized track record is actually losing to the S&P 500 for the first time in a very long time. Or maybe you're considering moving some money into Ken Heebner's CGM Focus (CGMFX) now that Fortune magazine has named him America's hottest investor.

In all of these cases, you're buying into funds when they're most likely to drop (reversion to the mean, anyone?), and selling when they're most likely to rise -- exactly the opposite of buy low, sell high.

Rule No. 1: Don't lose money
Short-term performance doesn't matter -- but a proven manager or management team, low expenses, and strong conviction do. When you find a fund with those characteristics, stick with it through both good times and bad. Even the best managers will inevitably have poor-performing years, so don't let a year or two of negative performance set you running.

For example, investors who sold out of Fairholme (FAIRX) -- a fund we recommended in Motley Fool Champion Funds for its strong management team, low expenses, and proven investing prowess -- because it lost to the market by 5 percentage points in 2003 have missed out on the impressive market-beating performance that followed from positions in stocks like Canadian Natural Resources (NYSE: CNQ), EchoStar (Nasdaq: SATS), and St. Joe (NYSE: JOE).

Needless to say, those investors who stuck with Bruce Berkowitz and his team through the tough times are now being rewarded for their persistence. But Fairholme isn't the only fund that's benefited investors with a buy-and-hold approach.

At Champion Funds, we tell our subscribers to focus on strong management, low expenses, and a proven long-term track record. If you'd like to see a comprehensive list of the mutual funds we believe have those traits in spades, click here for a 30-day free trial. There's no obligation to subscribe.

Adam J. Wiederman owns shares of Fairholme, but does not have a position in any other stock or fund mentioned above. Fairholme and CGM Focus are Champion Funds recommendations. Borders and Dell are Inside Value recommendations. The Fool's strict disclosure policy can be found here.