Is it me, or has it been a while since we trotted out that blindfolded chimp? You know, the little fellow who humiliates the pros on Wall Street by throwing darts at a newspaper stock table. Cute story. But is it true?

And if it is true, why? Or should I say how? And where does this leave a bunch of Joe and Josephine Odd Lots like us? I mean, if the billionaire boys' club can't hack it -- with all their computers and inside information -- what chance do we have of beating that pesky chimp?

The sad and happy truth
Assuming he actually hits a stock with every dart, it's pretty much true. The chimp's unbiased method (hence, I suppose, the blindfold) keeps him spot on the market average -- no better, no worse -- which is something most active money managers can't seem to manage. At least not after you deduct their fees and expenses.

That's the bad news. The good news is that it just doesn't matter. Not if you're managing your own stock portfolio. Not if you use independent sources. Certainly not if you ignore Wall Street research. As kooky as it sounds, this last distinction is one I confirmed myself while working daily with Wall Street's institutional "buy side."

Ironic, huh? Now for the really good news ...

You can beat the market
When I met Motley Fool co-founder Tom Gardner, he and his brother David were launching their first newsletter in a decade. That was a few years back, and I was skeptical. Should this guy really be charging for his research? I mean, could a Shakespeare nut in a Fool cap really pick stocks?

Fat chance. I'd spent the last five years peddling broker data and "analytics" to Wall Street. And here's the irony: It was my run-ins with the sell-side analysts and buy-side money managers that convinced me that -- lacking real inside information -- you simply cannot beat the market picking individual stocks.

I'd seen too many try and fail -- rotating into and out of the same old plays. Buying JDS Uniphase (NASDAQ:JDSU) and selling Corning (NYSE:GLW). Much like now, everybody owned Dell (NASDAQ:DELL), but back then, everybody also owned Lucent (NYSE:LU), a name you hardly hear these days. I recall James Cramer called them the stocks everybody loves.

Love 'em or not, by constantly rounding up and turning loose the usual suspects, investors sealed their fates. Most "pros" made money in the boom years and got creamed in the bad. But they couldn't beat the market over the long haul, and few ever really outperformed, certainly not enough to justify the fees we paid them. And not by picking great stocks, either.

Yes, there is a secret to picking winners
Remember Tom Gardner? Well, by the time he launched his small-cap newsletter, Motley Fool Hidden Gems, I was coming around. Tom had consistently pointed me to stocks like Moody's, which has doubled since I stashed it in my IRA. Or Whole Foods (NASDAQ:WFMI), which has done even better. And to my surprise, he was doing it using good old-fashioned legwork and bottom-up fundamental analysis.

Now granted, the criteria Tom applies are no secret to Wall Street. They've been passed down to us as finance majors and in books, from Benjamin Graham through Walter Schloss, Bill Miller, and Peter Lynch. Smart investors have always looked for:

  1. Solid management with significant stakes.
  2. Great, sustainable businesses.
  3. Dominant positions in niche markets.
  4. Sturdy (if not sterling) balance sheets.
  5. Strong free cash flow.

And yet, while Tom screens hundreds of stocks each month, surely something else set this performance apart from the market pros I'd known. Turns out it was two somethings: (1) Tom wasn't jumping into and out of stocks, sectors, or markets, and (2) I hadn't heard of most of the stocks he was recommending. Eureka!

Anatomy of a winner
Little Middleby makes ovens -- commercial ovens, of all things. When Tom floated the idea and then recommended it in Hidden Gems in November 2003, the business and financials looked great. But the markets are efficient, I thought; surely anybody could see what Tom and I saw.

But here's the catch. I ran the name on Multex and Bloomberg, even First Call. Nothing. The sell-side analysts didn't care, so the buy-side money managers -- the guys who really move the markets and who buy the sell-side research -- didn't either. Now that the stock's up more than 300%, guess who's been sniffing around? Wall Street.

Now, you know better than to draw conclusions from a few examples. And not all of Tom's Hidden Gems picks have tripled -- or even doubled. Still, as of Jan. 18, 2006, the 50-plus stocks recommended in Hidden Gems are up 34.1% on average. Compare that with about 13.5% if you'd stuck with the S&P 500.

What this means for you
It takes a lot to convince an efficient market nut like me, but I'm sensing a trend. Mark Hulbert, the newsletter industry watchdog, admits that some guys can pick stocks. But this Hidden Gems deal I'm seeing with my own eyes. Whether it's up or down from here, I'll be watching. I'll keep you posted.

Until then, I opened with Peter Lynch -- and the chimp -- for a reason. Unlike your typical Wall Streeter, both throw their darts at any stock on the board. Market cap too small? No such thing. No Wall Street coverage? Bring it on. No convoluted relationship with big investment banks? All the better. Never heard of it? Bingo!

That's how Lynch beat Wall Street with upstarts like Gap (NYSE:GPS) and Taco Bell -- now part of conglomerate Yum! Brands (NYSE:YUM). Lynch knew that companies that can reasonably rise five, 10, or even 20 times or more in value (1) are small but growing, (2) are well-run, and (3) operate in great industries. To which I'd add, they are (4) often run by founders with large personal stakes in the business.

Can I guarantee you'll become a great stock picker?
No. But I can be pretty darn sure you don't want to be relying on Wall Street research. You don't want to be shuffling around the week's most actives. Most importantly -- as much as I knock the market pros -- you don't want to be taking the other side of their trades.

In a choppy market like this, there's only one way I know to consistently make money with stocks. And that is to steer clear of the beaten path and buy where Wall Street isn't looking. But you can do it.

Need help? You can learn all about Tom Gardner's approach to finding undercovered, undervalued stocks with strong fundamentals and real earnings. Tom is offering a special 30-day free trial to his complete Hidden Gems service, with no pressure to subscribe. Click here to get started.

This article was originally published on Nov. 10, 2004. It has been updated.

Fool writer Paul Elliott owns Moody's and promises to keep you posted on Tom Gardner's progress at Motley Fool Hidden Gems. All picks and results are posted on the Hidden Gems website and can be viewed immediately with a30-day free trial. Moody's, Whole Foods, and Dell are Motley Fool Stock Advisor recommendations. Gap is a Stock Advisor and a Motley Fool Inside Value recommendation. The Motley Fool isinvestors writing for investors.