When it comes to owning mutual funds, nearly half of the households in the United States own them today, according to the Investment Company Institute. Their “2013 Investment Company Fact Book” found that most of these families have their employers to thank, as 72% of households that have invested their money in them have done so through a sponsored retirement program from their employer.

Indeed, one of the mainstays of retirement these days are mutual funds and there is a steadily growing number of funds to choose from.  While waiting back in 1940 there were less than 70 mutual funds to choose from, today there are nearly 7600. Not all of them are available through employer sponsored plans of course, but still there are many options available to employees. The trick is simply knowing which ones give the best returns, something that takes a little bit of research on homework.

If that’s what you’d like to do, you could do worse than taking advice from the CEO of Huber Capital Management, Joe Huber.  For over five years he’s been managing to the number one –ranked mutual funds, including Huber Capital Small Cap Value Fund and Huber Capital Equity Income Fund.

In fact, his investment firm received the strongest performing funds award, the Lipper Industry Award, for the third year in a row this year.

Recently Huber was talking with Tyler Matheson from CNBC  and said that there have been two main schools of thought for the last 80 years when it comes to investing; fundamental analysis and technical analysis. He said that his firm takes a completely different approach by including one more key factor, the psychology of the stock market.

This is an idea that emerged in the late 1960s and became known as “behavioral finance”. The research of two cognitive psychologists, Amos Tversky and Daniel Kahneman, focus on how people make decisions when faced with risky or uncertain situations. Since those early days of behavioral finance study, the theories have become much more elaborate.

Robert Shiller, the Nobel prize-winning economics professor, pointed out in his book “Irrational Exuberance” that market bubbles are often unintentionally amplified by the media.  He said the reason this happens is that news organizations concentrate on things that are already grabbing viewer’s attention.

An example of how the theory of behavioral finance works was offered by Huber when he talked about how uranium prices, at a multi-decade low, are only there due to the negative media brought about in the wake of the Fukushima nuclear plant disaster in Japan in 2011.

The perception that the public has, due to the disaster, doesn’t correlate with how nuclear power and uranium prices will likely be in the future he explained, because “the fact of the matter is that China, South Korea and India haven’t slowed down.” Huber also noted that even the Japanese government has recently expressed the desire to grow nuclear power in the future, something that the average consumer doesn’t realize.

Unfortunately, trends like these emerge because of what are known in behavioral finance circles as “decision flaws”. All consumers, indeed all humans, make these mistakes according to Huber, because most people tend to give too much weight to any recent data that they happened to see on television or in the news.

One of those assumptions, which keeps people from investing their money in nuclear power, is the assumption that the Fukushima disaster would bring it to a complete halt. And it’s by bucking these trends, and not making these assumptions, that Huber has done so well.

Filed under: Investing

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