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You might think that the hardest thing about being a good investor is finding the best-performing stocks. Yet even once you find winning investments, one thing is even harder: making sure you get the most out of them.

Cutting your winners short
As an investor, you always have to be aware of the impact your emotions can have on your trading. Obviously, there's nothing more satisfying than buying a stock that ends up making you money. Whether you did a huge amount of research to discover a little-followed stock, or followed the advice of a well-respected professional, seeing your initial investment grow in value makes you feel good about putting your money to work.

Conversely, once you have those gains, the last thing you want them to do is disappear. Unfortunately, that's exactly what many investors saw happen to their portfolios during the bear market in 2008 and early 2009. Companies that had made huge amounts of money for investors, such as commodity stocks like Mosaic (NYSE: MOS  ) and Vale (NYSE: VALE  ) , suddenly lost all the ground they had gained in previous years.

That desire for self-preservation leads many to sell their winners at the first sign of a pullback. While that sometimes works out well in the short run, unless you are able to time the market well a second time and buy back the shares at a lower price, you'll often miss out on future gains. It's often far easier to accept that you'll have to suffer through pullbacks -- but that the resulting gains from holding on for the long run will more than offset any temporary losses.

Finding discipline from fund managers
If you don't have the fortitude to handle the roller-coaster ride that stocks sometimes put you through, you might hire a fund manager to exercise that discipline for you. Even though it's tough for actively managed funds to even match the market, let alone beat it, you'll find that a number of winning funds share one trait in common: They all have low rates of turnover. These funds' managers tend to hang onto their winners, rather than trading frequently to score quick gains.

You can find low-turnover funds in a range of different market sectors. Here's a sample:


10-Year Return

Turnover Ratio

Top Holding

Vanguard Energy (VGENX)



ExxonMobil (NYSE: XOM  )

Gabelli Small-Cap Growth (GABSX)



O'Reilly Automotive (Nasdaq: ORLY  )

Royce Premier Investment (RYPRX)



Lincoln Electric (Nasdaq: LECO  )

Sequoia (SEQUX)



Berkshire Hathaway (NYSE: BRK-A  )

Amana Trust Income (AMANX)



Nike (NYSE: NKE  )

Source: Morningstar.

Given that the S&P 500 couldn't even manage to eke out a gain over the past 10 years, those returns are pretty impressive.

Why low turnover wins
There are a number of reasons why low-turnover funds have a natural advantage over those that trade more frequently:

  • More conviction. When top fund managers expect to hold onto their stocks for years, they make sure they only buy their best ideas. So when their picks turn out to be right, they can be really right -- and fund shareholders reap the long-term benefits.
  • Lower costs. It costs money for funds to buy and sell shares. Although trading costs don't make it into published fund expense ratios, they do get subtracted from investors' final returns. Every penny a fund pays to trade their holdings costs you in the long run.
  • Save on taxes. In addition, when funds hold onto their shares for longer periods of time, they don't incur capital gains taxes as frequently -- and when they do, the gains tend to be long-term, rather than more costly short-term gains. It's easy for high-trading funds to ignore those taxes, because they simply get passed on to investors. But they have a real cost that adds up over time.

None of means that it's impossible for actively trading fund managers to beat the market. Some do. But it takes more effort to overcome the headwinds that frequent trading creates.

Stick with your winners
Whether you make your own stock picks, or invest through mutual funds, you can learn from the experience of money managers who trade sparingly. A disciplined approach toward investing includes two strategies: making a limited number of stock picks, and having the conviction to hold onto those stocks through temporary setbacks in search of long-term profit. If you can follow those guidelines, you'll see the payoff in your overall performance.

Investing doesn't have to be hard. Let Fool contributor Paul Elliott point you toward the easiest money you'll ever make.

Fool contributor Dan Caplinger has found patience to be rewarding. He owns shares of Berkshire Hathaway. Berkshire Hathaway and Lincoln Electric are Motley Fool Inside Value picks. The Fool owns shares of Berkshire Hathaway, which is also a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy wants you to be a winner.

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