Let's face it: Picking your own stocks is an egotistical thing to do. You're essentially betting that you, Joe Oddlot, in your boxer shorts at your Compaq laptop, can beat the biggest minds and the best money out there -- people running billion-dollar mutual funds and private money, and wearing pants to boot!
Of course, I think it is possible to win this game, but that doesn't change the fact that playing takes a great -- maybe even a silly -- degree of self-assurance. But once in a while, even this egoist goes looking for a serving of humble pie. For that, I turn to funds.
The three Bs
There are three reasons why I use funds in my own portfolio, and why I think everyone, even stock hounds, should consider them. They are all brought to you by the letter "b": ballast, bliss, and brains. After all, who doesn't like a little alliteration, right?
Ballast
It's not a requirement for every portfolio, but investing is a psychological game, and ballast can help smooth that otherwise rough market ride. If you like small caps, as I do, the weekly gyrations can be nauseating. If you like value stocks, as I also do, waiting for the Street to reward out-of-favor companies can be worse than that awful, burning, "I gotta go but I don't have time" sensation we all got while playing hide-and-go seek as kids.
Don't believe me? Just take a look at a chart of some of the stocks I've owned or contemplated this year. Big positions in American Eagle Outfitters (NASDAQ:AEOS) and Pixar -- now chunked into Disney (NYSE:DIS) provided plenty of drama for me. But by steadying the boat with a position in a slow, steady, growing fund, the swings and the sweating were never more than I could stomach.
Bliss
We could all use more bliss, right? Listen, I like digging into company financials and market maneuvers. It can be very rewarding to try and figure out whether Komag (NASDAQ:KOMG), which makes hard-drive platters for the likes of Seagate (NYSE:STX) and Western Digital (NYSE:WDC), is cheap at a P/E of 10. Or maybe it's a company on the verge of obsolescence as manufacturers move more of their media-making capacity in-house.
But figuring all that out can get tiring. There are times when I'd rather be doing just about anything else. (Like now, perhaps, as my wife heads out into the sunshine for a bike ride and I sit here working on a hunchback and a case of carpal tunnel.) Unfortunately, you can't make informed investment decisions if you skimp on the homework. That's why I like the option that funds offer -- you know, relying on other people's know-how.
Brains
Like I said, stock picking is a bit of an egoist's game, but we'd be foolish (with a small f) if we didn't admit that other people could do just as well. No matter how smart we might think we are, more brains can't hurt. How else would you know whether or not something like General Electric (NYSE:GE) or Tyco (NYSE:TYC) is a buy these days? With their scores of business units, you need more than one set of eyes, ears, and calculators. That's why I don't mind the thought of handing my money over to some of the most time-tested and trusted brains in the biz. In these shops, teams of people -- like Chuck Royce or Bill Nygren -- work through all the details to arrive at market-beating investment decisions.
The Foolish bottom line
Of course, finding the right brains to give me the bliss to provide the ballast is a pretty daunting task. If you think picking stocks is hard, how about choosing funds? There are a lot more of those. Thousands more, in fact.
That's why, when it comes time for fund-finding, I don't even try to do it on my own. I check out my colleague Shannon Zimmerman's Motley Fool Champion Funds newsletter service. Month in and month out, Shannon picks only the cheapies -- the shops likely to beat the market -- and he even calls out the duds.
A free trial will show you the details, but here's the skinny: More than three-fourths of Shannon's funds are beating their benchmarks, and they're doing it by a combined 12 percentage points. If he can keep that up, I may just hang up my own green eyeshade, rely on his brains, and help myself to a lot more bliss.
This article was originally published Feb. 2, 2006. It has been updated.
Seth Jayson likes picking his own stocks, but sometimes he'd rather be riding his bike. At the time of publication, he had shares of American Eagle Outfitters but no position in any other company mentioned here. View his stock holdings and Fool profile here. Tyco is an Inside Value recommendation. Disney (because of the Pixar merger) is a Stock Advisor recommendation. Fool rules arehere.
