Six weeks or so ago, Fortune ran a cover that blazed “America’s Hottest Investor” -- with a major emphasis on “hottest.” The subtitle read, “With a 24% annual return over the past decade, this mad genius is arguably the best fund manager of our time.” (You can read the Fortune piece here.)

I first came across Ken Heebner, long known as “the mad genius of mutual funds,” about three or four years ago. While most of my heroes are lone traders and hedge fund guys, as opposed to mutual fund guys, Heebner is the one amazing exception.

And speaking of amazing, how does a mutual fund guy rack up 24% average annual returns over a decade? That would be no small feat in the midst of a full-fledged bull market. To do it in the 10 years that just passed -- a time in which the broad market has mostly just thrashed around -- is little short of amazing.

Heebner, who runs a little over $7 billion in his flagship CGM Focus fund, is nothing like your average mutual fund manager. (If he were, he wouldn’t be racking up such stellar returns.) There are at least four things the “Mad Genius” does that 99% of his peers don’t. Here they are in a nutshell.

First, Heebner likes to think top down rather than bottom up. He is always focused on the major trends, trying to put the puzzle pieces together. (Sound familiar? That’s what we do here, too.) “Ken is one of the best big-picture thinkers I've known,” says Chuck Clough, the former chief investment strategist for Merrill Lynch. “He does the research, and he’s got the courage of his convictions.”

Second, he is willing to go short as well as long. He can make money when markets are going down as well as up. This is a major advantage, especially in markets like the ones we’re in now. I’ve always thought that a long-only restriction is the equivalent of playing the game with one hand tied behind your back. While most Wall Street types pooh-pooh the short side, Heebner’s track record shows the value.

Third, Heebner is a true contrarian. Many of his biggest wins have come by taking stances that Wall Street doesn’t agree with. While most self-styled contrarians are little more than smart-alecks who like the sound of the word, this guy is the real deal. He loves being the odd man out. In his own words, Heebner says he is happiest “when everyone thinks I’m nuts.”

Last but not least, the mad genius isn’t afraid to make big bets... to really load up the boat when he knows he’s right. Back in 2006, Heebner revealed the essence of his method:

My huge outperformance occurs when I find one of these very contrarian strategies -- something supported by a lot of deep analysis -- and implement it in a concentrated way in the portfolio. Like investing in oil in 2004, when everyone thought it was going back to $25 a barrel. Or buying savings-and-loans in 1982, back when interest rates were 15%. I wish I could find one every year, but I can't.

Along with many other great investors, Heebner believes that diversification is a hedge against ignorance. To really hit the ball out of the park, you have to concentrate your knowledge... and then concentrate your positions. It’s not a game plan that works for everyone. But then, that’s exactly why there’s so much profit in it.

There is one more investing lesson Heebner taught me a few years back... amusingly enough, one that intersects with my experiences at the poker table. I’ll tell you about that one tomorrow.

Warm Regards,

JL

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