Before you invest a penny in a mutual fund, you should ask yourself a big question: Do you think you can beat the market?

It's not as dumb as it may sound. Given enough time, most professional money managers don't. (That's a little secret your broker, and your fund managers, don't tell you very often. I can't imagine why.)

A lot of people argue the stock market is so efficient at setting the right price for each stock that trying to get an edge is for suckers. If you buy that argument, then just invest in low-cost index funds, like the ( VTSSX) Vanguard Total Stock Market Index or State Street's exchange-traded Standard & Poor's Depositary Receipts ( SPY), and leave them alone. They'll follow the overall market, and they will save you a ton on fees.

It's not a bad strategy. It's better than the one most people are using right now.

But I don't buy it completely, for the simple reason I have seen Wall Street do too many stupid things too often. Betting against it at the right moments has done well for me and my readers.

I believe you can do better than just holding an index fund. But you have to know what you're doing. In a nutshell: You should understand that you're betting that your fund manager is wiser, and smarter, than Wall Street. Not luckier. Not more fashionable. Wiser, and smarter.

And you should understand that, even if you're right, that's only going to show itself down in the stretch. A couple of quarters means nothing. So it makes no sense to dump a good fund just because it's had a bad spell.

If you believe Wall Street is showing good sense every time it moves up or down, you should be in Vanguard. And if you don't trust the manager's judgment, what are you doing in the fund in the first place?

Yet trading in and out is what so many investors do -- with predictable results. If you want an example of this kind of idiocy, just take a look at what's been going on in Pittsburgh. It's a sorry tale that even includes Merrill Lynch ( MER), which doesn't surprise me as much as it should.

Pittsburgh is where Ron Muhlenkamp, a folksy and good-humored 62-year-old investment veteran, runs the small firm and ( MUHLX) mutual fund that carry his name. I've been an investor in his fund for a number of years. Muhlenkamp was raised on a farm in western Ohio and still talks like it. He actually says things like "shoot" and "aw shucks." Most of his analogies involve the weather and planting crops.

His stock market record is amazing. He's been beating the market pretty consistently for more than three decades. That's for private clients and, for the last 18 years, at his mutual fund. If you'd invested $1,000 in this fund when it launched in 1988, you'd have more than $9,600 today. That's $3,000 more than you'd have made in an index fund over the same period.

Muhlenkamp posted particularly stellar returns from 2000 to 2004, when he rode the boom in small companies and in housing-related stocks. For most of its life, the fund has remained tiny, with just a few hundred million dollars. Then, after a wild 48% gain in 2003, word started getting out. Money poured in: around $2 billion of it during 2004 and 2005, swelling the fund to a record $3 billion.

In April 2006 Merrill Lynch, which had spent two years checking out Muhlenkamp's fund, was confident enough to invest $60 million of its clients' money. Yet it so happened that they came in just before Muhlenkamp had two bad quarters, in the middle of last year. As a result his fund ended 2006 up just 4.08%, while the S&P jumped 15.80%.

The result? Investors who had piled into the fund late have already yanked nearly $400 million back out. That's a big slice of $3 billion.

"I'm not really surprised, but I am disappointed," admits Muhlenkamp. He says he wishes he had done a better job of explaining his investment approach to new clients. The fund manager says investors who chase the most recent returns, hoping they will continue, risk "planting corn in October because it's grown so well since April."

Merrill Lynch itself withdrew half of its clients' money, just six months after investing it. Muhlenkamp isn't surprised by that either. He believes Merrill is primarily a marketing company. But he notes the logical absurdity behind the move: "The belief that I should be measured against the market on a short-term basis, held by people who no longer believe that the market is efficient."

None of this, though, ruffles Ron Muhlenkamp unduly. His fund owns stock in Merrill Lynch: "The reason," he says dryly, "is because they're a great marketer."

And he views these cycles in the market, and the economy, like the seasons back on the old family farm. "If you can tell the difference between spring and fall, the rest pretty much takes care of itself," he says. "My best analogies are weather-related -- everyone knows your garden only grows six months of the year."

Right now, Muhlenkamp sees springtime for the economy. He believes it is in much better shape than many people think, and he expects it to pick up. So he is starting to pick stocks that will benefit. Among those on his radar screen: mortgage lender Countrywide Financial ( CFC), credit card company Capital One ( COF), Harley-Davidson ( HOG), recreational vehicle maker Thor Industries ( THO), and telecom router giant Cisco ( CSCO) .

At the same time, though, Ron Muhlenkamp is looking for his next big idea. He points out that if you catch the big trends, like financials in the '90s, or housing since 2000, you can ride them for years. Today, he believes, the economy is in transition. The housing boom seems to have ended, but the next big trend has yet to emerge. "We'll try to get an idea of where the public is moving their money," he says. "I am much better at observing things than predicting them, but a trend by the public will last long enough that I can afford to miss the first six months."