Many investors go through life with misconceptions -- ones that can hurt returns. Some think, for example, that stock splits are a big deal. They're not. (Before a 2-to-1 split you have 100 $40 shares worth $4,000. Afterward, you have 200 $20 shares worth $4,000. Yawn.)
Others may think that Toll Brothers (NYSE:TOL), with its P/E ratio of approximately 5, is a better buy than iRobot (NASDAQ:IRBT), with its recent P/E close to 100. Well, maybe it is -- but never put too much weight on just one measure, particularly one that's based on easily manipulated or cyclical numbers such as earnings, without considering the strength of the business going forward.
Another common misconception is that while individual stocks can reward you with incredible returns, mutual funds are an option for the less daring or less knowledgeable. Wrong, wrong, wrong!
Mutual funds can and dobeat the market. The majority of mutual funds don't do as well as the market average, leaving investors worse off than if they'd just plunked their money into an S&P 500 index fund, but those in the know can find funds that will earn great returns with less volatility.
Meet some powerhouses
One such fund is BridgewayAggressive Investors 1 (BRAGX). Over the past 10 years, its average annual return has been 19.6%, enough to have turned a $10,000 investment into $60,000. How has Bridgeway done it? Well, by investing in some of the best rapidly-growing companies it could find. Its current top holdings include Valero Energy (NYSE:VLO), NutriSystem (NASDAQ:NTRI), BMC Software (NYSE:BMC), and Hansen Natural. You may know Hansen as the top-performing stock of the past decade.
Another dynamite performer is Fidelity Low-Priced Stock (FLPSX), with a 10-year average annualized return of 16.2%. That's enough to have turned $10,000 into nearly $40,000. Its top holdings include PMI Group, Dollar General (NYSE:DG), and Constellation Brands.
Unfortunately, both of these funds are currently closed to new investors -- which shows how good they really are. That's because when a fund is very successful, it attracts huge sums of money, and when it's very big, it can be hard to find enough good places to invest all that money. So as many funds grow big, they tend to do worse. Closing, therefore, denies the fund company extra income from new investors, but it helps existing shareholders earn better returns.
Find great funds, and let us help
Don't let that bad news get you down -- there are still plenty of terrific funds out there. A little legwork can turn up lots of strong funds, ones with impressive track records and managers whose styles you respect. To find these funds, you can just look for the same traits that made Aggressive Investors such a great performer: a reasonable expense ratio relative to its peer group; a fund manager, John Montgomery, who has loads of experience and sticks to his strategic guns; and a shareholder-friendly disposition.
You can also get a short list of fund superstars by joining our Motley Fool Champion Funds newsletter. Try it for free for a month, and see which funds our analyst Shannon Zimmerman has recommended -- and why. Together, his picks have more than doubled their benchmarks' return, gaining an average of 16% versus 7% in the same time period.
This article was originally published on May 12, 2006. It has been updated.
iRobot is a Rule Breakers selection. Valero is a former Hidden Gems pick.
SelenaMaranjian owns shares of Fidelity Low-Priced Stock. For more about Selena, view her bio and her profile. The Motley Fool is Fools writing for Fools.
