An oft-overlooked key point in the great stocks-vs.-mutual funds debate is that investing is never an either/or proposition. Individual stocks and mutual funds can coexist peacefully and profitably in the same portfolio. They certainly do in mine, and even if you consider yourself a dyed-in-the-wool stock jock, I suspect that they do in yours, too.
After all, either through taxable accounts or tax-favored ones -- such as 401(k)s and IRAs -- more than 90 million Americans invest in mutual funds. And if you're reading this, I have a strong hunch that you're among them.
Lessons learned
Still, even though you likely own funds, you probably haven't thought of them as a resource for honing your skills as an individual stock picker. Could be that's because you have lousy funds in, say, your 401(k) plan. Or it might be because you know that, over time, the typical mutual fund loses out to its comparable index -- whether it be the Nasdaq 1000
With that kind of track record, you might suppose, what on earth could funds have to teach you?
It's a fair question, but as the Fool's resident fund geek and all-around point guy on our Champion Funds newsletter service, I'd argue that you can actually learn a lot from mutual funds and, more precisely, from the folks who manage them. The thing is, you have to study with the right professors -- which is exactly what we do in each issue of the newsletter.
Making the grade
Indeed, to make the grade as a Champ -- and I do grade 'em, by the way -- a fund needs a battle-tested manager who has earned his keep and then some over the long haul. Marty Whitman is a case in point, an expert stock picker (and seller) whose fund has trounced both the S&P and its typical Morningstar peer over the past 10 years by wide margins.
That success owes in large part to Whitman's strong knack for making smart, contrarian stock picks. He had the good sense to snap up Kmart bonds, for example, when that retailer's demise was a forgone Wall Street conclusion. Here's a surprise: Wall Street was wrong again. The firm notched a fat gain in 2004, and this year the newly christened Sears Holdings -- as the merged forces of Kmart and Sears are now known -- was up more than 60% as of July.
Whitman swapped out his bonds for an equity stake a while back, and has pared back his position significantly -- and the stock has shed 15% over the last month. This year, Whitman has been acquiring substantial stakes in Collins & Aikman Seniors and overseas operations, such as AVX
Tour of duty
That's also true of Bill Nygren, the ace stock picker who, among other things, co-manages the Oakmark fund. Nygren has been on duty there since March 2000, and since then, Oakmark has more than doubled up on the returns of its typical competitor while leaving the S&P in the dust, too. Indeed, from April 1, 2000 through the end of April 2005, Oakmark -- whose top holdings currently include the likes of Yum! Brands
As with Whitman, Nygren's success is due in great part to his willingness to cherry-pick winners from areas of the market that other investors are neglecting. In the July issue of Champion Funds, he spoke candidly about his stock-picking strategy, including the three key criteria that it takes for a company to make it into his portfolio.
For starters, he needs to see a share price that reflects a substantial discount to his estimate of enterprise value -- i.e., the price an informed investor would pay for the entire business. For finishers...
Beat the market
Well, for finishers, click here for a 30-day risk-free trial to the newsletter and read the interview in its entirety. Not to be presumptuous or anything, but my hunch is that, when it comes to beating the market, your track record as a stock picker perhaps isn't quite as strong as Whitman's or Nygren's.
If that's the case, you owe it to yourself -- and to your portfolio -- to check out Champion Funds. You've got nothing to lose, and a world of investment insight to gain.
This column was originally published on June 7, 2005. It has been updated.
Shannon Zimmerman, editor and analyst for Motley Fool Champion Funds , owns shares of Vanguard Total Stock Market and the Nygren co-managed Oakmark Select. The Fool has a strict disclosure policy.
