As always, Warren Buffett -- the world's greatest investor -- was spot-on in his letter to shareholders this year: "Over 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. ... Instead, many investors have had experiences ranging from mediocre to disastrous." Why? According to Buffett, two of the biggest culprits are:

  1. Too much trading.
  2. Not enough research.

That's why Champion mutual funds should be the foundation of every investment portfolio. They allow investors to harness the power of the stock market while avoiding the pitfalls that sink so many individual investors. But with more than 8,000 funds vying for your hard-earned investment dollars, finding those Champs can be a harrowing task.

Take me to your leader
The first step in finding a Champ is to identify talented management. The best -- such as Marty Whitman and his team at Third Avenue -- have a clear strategy, which they execute successfully in good times and bad. To determine whether a fund manager's interests are aligned with yours, make sure the managers:

  1. Own shares of the fund and have a long leadership tenure.
  2. Keep the fund's expense ratio below its peers.
  3. Write clear and forthright shareholder reports.
  4. Hold their compensation in line with achievement.
  5. Follow a responsible closure policy.

A true Champion
The aforementioned Whitman has managed Champ Third AvenueValue since its 1990 inception. During that time, the fund has achieved market-thumping 15% annualized returns by following a "safe and cheap" investment philosophy. That's buying unloved companies when they're down and watching them return to prominence. Even during the tech bubble, Whitman adhered to this philosophy to the ultimate benefit of clients.

Today, Third Avenue Value's top holdings include Toyota (NYSE:TM), Sears Holdings (NASDAQ:SHLD), USG (NYSE:USG), St. Joe (NYSE:JOE), MBIA (NYSE:MBI), MilleaHoldings (NASDAQ:MLEA), and Legg Mason (NYSE:LM) -- the fund having recently increased its stake in Toyota and pared its stake in Sears. What's more, the shop is also the home of another Champ -- the soon-to-close Third Avenue Real Estate Value. That's a good sign that primo manager Whitman is hiring other good people.

The X factor
Quality of management is one factor at the heart of Fool fund guru Shannon Zimmerman's forward-looking rating system, which has helped his picks more than double the performance of comparable indexes. But Zimmerman takes quantitative factors into account as well. When looking for funds, keep your eyes peeled for low expense ratios, competitive turnover ratios, diversification that fits with your portfolio, and, of course, market-beating returns. But each of those tends to show up when good management is at the helm.

To view more of Zimmerman's Championship criteria, favorite mutual funds, and model portfolios, enjoy a 30-day free trial to Motley Fool Champion Funds. A trial includes access to all back issues and previous picks, mid-month reports and updated model portfolios, and dedicated discussion boards, where Zimmerman posts regularly and where you'll find hordes of like-minded investors sharing wisdom, ideas, and analysis. Plus, there's no obligation to subscribe. Click here to learn more.

Tim Hanson owns none of the companies or funds mentioned in this article. At the Fool, no writer is too cool for disclosure ... and Tim's pretty darn cool.