The Best Investment Strategy

When I say I'm a value investor, people often look at me as if I'm crazy. I'm not. I just know how to stack the odds in my favor. And I'm Foolish enough to believe that everyone should include value stocks as a significant part of their investment portfolios.

Value doesn't always lead to quick returns (what investment strategy does?). But over the long term, it blows all other strategies away by a huge margin, and it does so with less volatility, to boot. It's no coincidence that Warren Buffett is both the best-known value investor and the world's second-richest person.

Ibbotson Associates compared the performance of value stocks, growth stocks, and the S&P 500 between 1968 and 2002. The results are clear:

Investors who focused on value finished with twice as much cash as the growthies and four times as much as the plain-vanilla indexers. That's the difference between dog food and steak.

Beat that
That study mechanically divided the market into value and growth categories, meaning that each included both great stocks and complete garbage. Suppose that instead of just buying them all, you focused only on the best and the cheapest. Avoid the worst performers and focus on the best.

That's what we attempt to do at our Motley Fool Inside Value investing service, looking for businesses with the following traits:

1. Solid financials
2. Strong competitive position
3. At least 30% undervalued

We don't care what sector the stock is in -- our picks include tech, banking, health care, and more. In addition, almost all our picks have significant future growth potential. We love to buy growth, as long as we can buy it at a cheap price!

Such picks can really outperform. Take, for example, the recent case of Martha Stewart Living Omnimedia (NYSE: MSO), when the revelation of Martha's stock trading scandal involving ImClone (Nasdaq: IMCL) and subsequent dismissal from her company pushed the stock down more than 50% between May 2002 and June 2004. Martha Stewart Omnimedia rebounded from the controversy quite nicely, and investors who got in around the lows are now sitting on 200% returns.

Buffett used a similar strategy with his purchases of Coca-Cola beginning in 1988, at a dividend-adjusted price of around $4. Over the next 15 years, he made a 20-bagger on that investment.

These aren't isolated examples. Opportunities come up again and again to investors who are both patient and alert. I'm thinking of Caterpillar (NYSE: CAT) in 2000, FedEx (NYSE: FDX) and eBay (Nasdaq: EBAY) in 2001, and Merrill Lynch (NYSE: MER) in 2003.

The Foolish bottom line
Such opportunities are out there right now, so make sure you look for them. If you'd like a shortcut, try our Inside Value newsletter. Eight of our picks are still trading at what we consider bargain levels. You can browse through the entire list using a free 30-day pass. They may be just what you need to jump-start your portfolio's long-term performance.

This article was originally published on Sept. 20, 2006. It has been updated.

Fool contributor Richard Gibbons doesn't just know about stacking odds; he knows how to stack chairs and plates as well. He does not have a position in any of the securities discussed in this article. FedEx and eBay are Motley Fool Stock Advisor picks. Martha Stewart is a former Stock Advisor pick. Coca-Cola is an Inside Value recommendation.The Fool has adisclosure policy.