The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 51. Investment Style

NOT SO LONG AGO, investors were advised to buy funds based on the fund's objective, such as "aggressive growth" or "income" or "growth and income." But the labels were broad and confusing. Two aggressive growth funds were likely to pursue two entirely different strategies in search of growth.

As investors have grown more sophisticated, they've begun to look at funds based on the manager's investment style. By style, I mean chiefly two things: What size companies does the fund buy, and what method does it use to select them? You should keep investment style in mind as you invest your 401(k) portfolio as well.

The two key investment styles used by stock investors are value and growth. Value investors look for companies with a hidden value not reflected in the stock price. That's done in myriad ways. Outstanding Investor Digest, an excellent newsletter for the real hard-core investors, devotes more than sixty-five pages in each issue to exploring the ways investors like Warren Buffett of Berkshire Hathaway make investment decisions. I interviewed Henry Emerson, editor of this quirky publication some years ago. Like most people who put together a serious publication based on their passion—and maybe their search for truth—Emerson is a fascinating guy, perhaps a genius, who lives and breathes value investing.

Some of his investors might poke around in bankruptcy filings. Many look for companies that hold assets like real estate that could be sold for a gain. ...