How to Select a Mutual Fund - A 10-Part Guide to Picking Winning Mutual Funds

Like all things in life, there are different philosophical approaches to managing money. Personally, I am a value investor. I believe that every asset has what is known as an “intrinsic value”, that is a “true” value that is equal to all of the cash it will generate for the owner from now until doomsday discounted back to the present at an appropriate rate that takes into account the risk-free Treasury return, inflation, and an equity risk premium. Over time, I look for businesses that I believe are trading at a substantial discount to my estimate of intrinsic value. This causes me to buy very few businesses each year and, over time, has led to very good results. This doesn’t always mean owning bad companies with low price-to-earnings ratios because, theoretically, a company could be cheaper at 30 times earnings than another enterprise at 8 times earnings if you could accurately value the cash flows. In the industry, there are mutual funds that specialize in this type of value investing – Tweedy, Browne & Company, Third Avenue Value Funds, Fairholme Funds, Oakmark Funds, Muhlenkamp Funds, and more.

Other people believe in what is known as “growth” investing which means simply buying the best, fastest growing companies almost regardless of price. Still others believe in owning only blue chip companies with healthy dividend yields. It is important for you to find a mutual fund or family of mutual funds that shares the same investment philosophy you do.