If you buy last year's top-performing stock funds, you have a good shot at earning market-beating results over the next 12 months. What if you buy last year's worst performers? That, too, could earn you superior returns.

Puzzled? I am not advocating either strategy. But their success offers valuable insights into how the stock market works — and that could help bolster your portfolio's performance.

SEEKING HEAT

Each January, the No-Load Fund Investor, a newsletter in Brentwood, Tenn., suggests buying the top-performing no-load stock fund from the prior year and then hanging on for the next 12 months.

In making its annual recommendation, the newsletter avoids certain funds, such as those focused on foreign stocks or a single industry sector. This year's pick: FBR Small Cap, which soared 28.5 percent in 2006.

"It's a speculative strategy," concedes the newsletter's editor, Mark Salzinger. "We generally recommend investors own seven to 10 funds." Still, Salzinger says you might try the hot-fund strategy with a small portion of your portfolio.

If history is any guide, it could be mighty rewarding. The newsletter's annual picks have clocked a 13.6 percent annualized gain over the past 15 years, versus 10.6 percent for the Standard & Poor's 500-stock index.

But here's where things get curious: It seems you can also score sizzling gains with funds that are stone cold. Consider the strategy followed by Jon Fossel, retired chairman of New York's Oppenheimer Funds. Each year for the past 19 years, he has bought the Oppenheimer stock fund that has fared worst over the prior 12 months — and he, too, has outpaced the S&P 500 by a wide margin.

In making his annual pick, Fossel excludes sector funds and those funds that have been around for less than three years. For 2007, he purchased Oppenheimer MidCap, a growth-stock fund that gained some 2 percent in 2006.

Fossel tested his strategy using other companies' funds and got similar results. But he says that, for the strategy to work, you need a company with a broad array of offerings, including funds focused on large-company growth stocks, large value, small growth, small value and foreign shares.

BOUNCING BACK

What explains these impressive results? Mark Carhart, a managing director at Goldman Sachs Asset Management, studied diversified U.S. stock funds for his doctorate thesis. A key finding: Each year's top performers often fared well the following year. "It's the momentum in the stocks that drives that continued outperformance," he says.

By contrast, Carhart found the worst performers typically struggled in the year that followed. The fund industry's laggards, however, often include a slew of small, oddball funds with high costs — and Fossel may have avoided these perennial losers by sticking with a single, well-run fund family.

With Fossel's strategy, "you're getting 'mean reversion' of individual stocks," suspects Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School. "Something negative drives stocks below their true value, and then you get the bounceback."

It is, of course, risky to bank heavily on a single fund focused on one market segment. Instead, you ought to own a globally diversified portfolio. That said, you might take a few cues from Fossel's and Salzinger's success.

Suppose you're adding new funds to your portfolio. One strategy: Hunt for low-cost funds that have performed poorly because their investment style has been out of favor. But before you buy, wait for performance to perk up. That way, you should have a sector that's relatively cheap — but where the momentum is now in your favor.

Similarly, let's say you want to rebalance, to bring your funds back into line with your target portfolio percentages. If you have a fund that's posted a huge one-year return after years of lackluster results, you might delay trimming back your position for another year or two, so you can squeeze more gains out of the underlying market momentum.