I'm not ashamed to say it: I don't think I could've spotted Wal-Mart (NYSE:WMT) back in the 1980s.
Most investors think they can pinpoint consumer trends and latch on accordingly, but hindsight, as the cliche goes, is 20/20. The little family-owned operation from Arkansas has risen nearly 4,900 times in value over the past quarter-century, taking shareholders on a wild ride. How many among the investing lot were prescient enough to spot the proverbial needle in the haystack of public companies?
Fortunately, successful investing isn't about finding the stock equivalent of the next Michael Jordan. It's about growing your savings as much as possible without assuming huge risk. If picking four or eight or 16 individual companies -- out of an ocean of more than 9,000 -- sounds like a daunting task, well, that's because it is. But there's an easier -- and safer -- way.
Don't bet the house on one roulette spin
Simply invest in a basket of stocks. You can own superior stocks without having to constantly monitor, update, or correct your portfolio. And with just a little bit of effort, you can put more than one superior stock to work in your portfolio.
Let me explain.
The case for funds
As Fool fund guru Shannon Zimmerman puts it, "No other type of investment offers you the built-in diversity of mutual funds." Superior mutual funds -- here at the Fool, we call them Champs -- don't tie your fortunes to a single company or industry.
John Montgomery is a Championship stock picker. His BridgewayUltra-Small Company fund has delivered 26.96% returns over the past five years (making that fund one of the top 10 performers of the new millennium, according to Yahoo! Finance). The fund has been up in nine of its 10 years of existence -- an incredible batting average during the post-tech-bubble bear market.
Clearly at the head of its class, Bridgeway Ultra-Small Company has delivered astounding profits with less downside risk. How, you ask? Look no further than the fund's top five holdings. DeckersOutdoor (NASDAQ:DECK), maker of the popular footwear brands Teva, Ugg, and Simple, has been a five-bagger since 2000. Petroleum Development (NASDAQ:PETD), an eight-bagger, deals in the production and marketing of natural gas and oil. SFBC (NASDAQ:SFCC), a seven-bagger, is a drug-development services company. Navarre (NASDAQ:NAVR), publisher and distributor of home entertainment products, has increased sevenfold since 2000.
"Sign me up!" you might be saying to yourself. Unfortunately, that fund has closed to new money. The lesson, however, is an important one.
Many Fools -- me included -- believe that small caps have the potential to juice your returns. If you wanted exposure to small caps in 2000, you could've bought shares in any of the roughly 4,600 companies capitalized under $2 billion trading on the New York Stock Exchange, Nasdaq, or American Stock Exchange.
Or you could have bought into Ultra-Small Company, which exposes investors to small caps across a potpourri of industries. It's ideal for investors seeking sector diversification. The four aforementioned stocks make up about 16% of the fund's holdings. Their industries run the gamut from consumer products to energy to health-care services to personal entertainment. The unifying theme is their market capitalization.
There's more where that came from
Shannon recommended a sister fund, BridgewaySmall-Cap Value, to Motley Fool Champion Funds subscribers in January. Also run by John Montgomery, this fund is beating the S&P 500 index 12.7% to 1.43%, and it's open to new money.
The top holdings of Small-Cap Value are similarly diverse, ranging from industrial services firm Universal Forest Products (NASDAQ:UFPI) to seaborne transportation specialist OMI (NYSE:OMM). Because it casts such a large net, the fund can let the winners rise to the top without sinking to the bottom because of the losers. Too large a net could hurt those gains, but Montgomery's track record instills a great deal of confidence that his nets are intelligently cast.
Kids, please try this at home
To find a Championship fund for yourself, run a quick screen:
- Does the fund manager have a proven track record of beating the market, its peers, and every comparable index?
- Does the fund manager invest in his own fund?
- Is the fund free from loads and a luxury-item expense ratio?
If "yes" answers all three questions, it's time to dig in .
. Or you can allow Shannon to do some of the legwork for you. Thus far, Shannon's picks have doubled the S&P 500 index (10% to 5%). To receive one of his Champion mutual fund recommendations per month, try Champion Funds for 30 days -- for free. A trial gives you full access to all 28 picks to date, our three model portfolios, and the full library of Shannon's interviews with all-star fund managers (John Montgomery included). There's no risk, so if you don't like the service, you can cancel without paying a dime. (Or, for a limited time, you'll get the Fool's new Blue-Chip Report 2005 for free with a one-year subscription.) Click here to learn more.
Brian Richards does not own shares of any fund or stock mentioned in this article. Deckers Outdoor is a Motley Fool Hidden Gems recommendation. The Motley Fool has a strict disclosure policy.
