Between 1984 and 1999, during a great bull market in America, roughly 90% of mutual fund managers underperformed the Wilshire 5000 Index -- a relatively low bar to beat.

Think about this for a moment. Only one out of 10 "expert" mutual fund managers generated a return higher than that of the overall general market. Why does this happen? How is it that an overwhelming majority of intelligent professionals fail to produce a par result for their investors?

The sad truth
The answer is twofold. First, mutual fund managers tend to focus on short-term results. Second, they tend to follow the herd. Mutual fund managers define their investment strategy with particular styles such as "small-cap value" or "small-cap growth" to isolate the parameters that guide their portfolio selections. Any business that does not fit into the particular investment focus of the fund is screened out, regardless of its suitability for investment.

The reason mutual fund managers limit themselves to a particular class of equities is because doing so appears rational, and is therefore considered the safest option. Who ever wants to appear irrational? This rationality (or lack thereof) is how mutual fund managers are able to justify their performance to their investors.

Investors, wanting evidence that a mutual fund manager's decisions are reasonable, compare managers' decisions and performances with those of their peers. Mutual fund managers, knowing this investor behavior and being anxious to protect their jobs, simply mimic their peers. Just look at how many funds own many of the same large stocks:

Stock

No. of Funds Owning Shares

Google (NASDAQ:GOOG)

1,967

Pfizer (NYSE:PFE)

2,101

Boeing (NYSE:BA)

1,017

Altria (NYSE:MO)

1,434

Procter & Gamble (NYSE:PG)

1,460

Target (NYSE:TGT)

1,263

Source: MFFAIS.com.

This mimicking destroys any informational advantage these managers may have had, leading to a shortage in investment possibilities. As John Maynard Keynes wrote in The General Theory of Employment, Interest and Money, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

What does all this say about mutual fund managers? That, in their goal of wanting to do what seems to be safest, they follow the crowd, resulting in performance below that of the general market by sticking to the same investments as their peer groups.

A different way
Here at the Fool, we are anything but conventional. In fact, some might go so far as to say that we are an extremely unconventional band of brothers and sisters. That's a good thing, you see, because it means we filter out most of the nonsense and give you the skinny on what really matters in order to multiply your money.

Fortunately for investors, they have options. Two of them are index funds and what legendary investor Warren Buffett terms "super investors." While this article focuses on the latter, here's a simple word on the former: Index funds are a great way to mimic the market without the necessary (sometimes outrageous) fees of a mutual fund. These low-cost, passively managed funds are, in general, far superior investments to mutual funds in many asset classes.

However, it is possible to have consistent market-beating returns in mutual funds -- and by a healthy margin, at that. When you think about trouncing the market, names such as Bill Ruane of the famed Sequoia Fund, Bill Miller of Legg Mason (NYSE:LM), and Peter Lynch of Fidelity come to mind. Some of these names stand out more than others, but all of them and dozens like them have amassed equally astonishing performances year after year through bull and bear markets -- and they did it in their own way. Miller owned stocks Ruane did not own, Ruane owned stocks Lynch did not own, and so forth.

The common thread among these "super investors" is their relentless pursuit of quality investments at attractive prices, otherwise known as value investing. Another super investor, Warren Buffett, beautifully illustrates this idea as "buying dollar bills for 50 cents." This discipline, coupled with patience and a total lack of emotion about the market's daily swings, has served these investors amazingly well over decades.

Buffett once remarked, "Investing is simple, but not easy." One simply needs to find good businesses run by able management selling at a good price.

Take a businesslike approach
Our analysts at Motley Fool Hidden Gems also follow their own path. Year after year, the small-cap newsletter's analysts have found market-beating stocks, utilizing a focused approach for finding well-run, attractively valued small-cap companies.

Ben Graham, the dean of value investing and a mentor to some of the greatest investors, has said "investing is most prudent when it is most businesslike." A simple concept, but one that very few mutual fund managers practice.

When you purchase a home, you hunt for a good price, safety, and a quality neighborhood. You do your research and then purchase the most attractive home, giving strong consideration to these factors. Investing and investment managers must be the same way, so as not to be mistaken for speculators. You want a bargain, safety, and quality management.

While not all investors will choose to manage their own money, investors must demand market-beating performances from their financial gatekeepers if they are to justify the fees they pay them to manage their money.

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This article, written by Sham Gad, was originally published on May 29, 2007. It has been updated by Dan Caplinger, who owns shares of Altria. Legg Mason and Pfizer are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers recommendation. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of Procter & Gamble and Legg Mason. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.