I don't know about you, but every time I hear one of the talking heads on CNBC say "the market's overvalued" or "the market's oversold," I shake my head in disbelief. How anyone can get an accurate read on the valuation and growth prospects of all 10,000-plus companies in the publicly traded universe, and then sum them all up as being "expensive" or "cheap" in a 30-second sound bite, is simply beyond me.

Maybe it's because they're the Wall Street Wise Men and I'm just a simple Fool, but I find it terribly difficult to put a value on more than one company at a time. With an individual company, I can calculate its enterprise value and its growth rate. I can count the cash in its bank account and match that up against the debt on its balance sheet. I can listen to its CEO on the company's earnings conference call and decide that "this sounds like an honest guy" or "this guy's selling snake oil."

But the whole market? Why, the market doesn't even have a CEO.

Market, shmarket
Honestly, though, it doesn't matter -- because I don't intend to invest in "the market," anyway. Why would anyone settle for the average 10.5% annual market returns, knowing that it's possible to make so much more?

Investing legend Peter Lynch, former manager of the Fidelity Magellan Fund, earned 29% annual returns for his clients during his tenure there from 1978 to 1990. More recently, Bill Miller, head of the Legg Mason Value Trust, has outrun the S&P's average returns by a full 7% over the past 10 years. And here at The Motley Fool, our own Philip Durell has been continuing that trend. He's beating the S&P by more than 6 percentage points (more than twice the market's overall return) since the Motley Fool Inside Value newsletter began last year.

What's the secret to achieving annual investment gains that rival the achievements of some of the greatest investing minds on the planet? Well, in grade school we used to refer to it as "wandering eyes." In business, though, we call it "studying the masters." It means imitating the successful strategies devised by those who've come before us, and constantly tweaking and improving upon them to suit our own style.

Consider a few examples.

Buy what you know
If there's one investment maxim that's most commonly associated with Peter Lynch, it's to "buy what you know" -- to invest in companies that you're already intimately familiar with, whose stores you shop in, whose products you use every day. After all, why spend days and weeks researching an unfamiliar company when you have practical knowledge of another? That's the kind of logic that Mr. Lynch followed when buying companies such as Pep Boys (NYSE:PBY), which ultimately made him a multimillionaire. It's that same logic that led us at Inside Value to recommend buying stock in Anheuser-Busch (NYSE:BUD) back in April.

Seek out hidden value
Some companies are so difficult to comprehend, they befuddle and bemuse your ordinary investor. And even a seasoned Wall Street analyst, one suspects, has a hard time making heads or tails of a company like General Motors (NYSE:GM), which by all accounts makes cars, but which derives much of its profits from banking. Companies perceived to be doing one thing that in fact do something else entirely can be terribly difficult to pin a "real value" on. And when few are certain of what a company's truly worth, therein lies opportunity.

However, true value doesn't remain hidden forever. While legendary economist Eugene Fama may have been overstating the case when he developed his "efficient market" theory, the fact of the matter is that, given enough time, Wall Street will ultimately figure out what any company is really worth. The trick in value investing is to beat Wall Street to the punch, to find the value before others do, to buy ahead of the pack, and, ultimately, to be the one holding the shares when the slowpokes from Wall Street come wanting to buy. Critics may have laughed when Bill Miller made third-string search player Ask Jeeves one of the top 20 holdings in his Opportunity Trust mutual fund. But with the company's recent buyout by another Miller fave, InterActiveCorp (NASDAQ:IACI), he's the one smiling now.

Profit from panic
Listen, I love quoting the investing masters as much as any financial writer does. But let me confide a pet peeve to you: I'm tired of abiding by the unwritten rule that the only things worth quoting are things said by men who are either old or, more often, dead. We young'uns come up with the occasional zinger too, you know. For example, take these two great quotes by the Fool's own senior investing editor, Bill Mann:

  • "The best time in the world to buy a great company is when everyone else is afraid of it, or hates it."
  • "I'd suggest to you that the time to be investing is when everyone else is running away in terror."

Words to live by -- or at least invest by. And they match up with another of the investing philosophies we follow at Inside Value: There's profit to be made in others' panic. When the suits up on Wall Street are running scared, afraid their bosses might catch them owning a stock that's garnering negative headlines in consecutive issues of The Wall Street Journal, they're not thinking too much about the business' fundamentals -- they just want out. Now.

As individual investors, however, we're our own bosses. No one's going to fire you for buying an unpopular stock. Sure, the spouse, kids, coworkers, and neighbors may chuckle a bit at your Foolishness, but if the company is sound, who do you think will have the last laugh?

I suspect there was some bemusement among Wall Street's Wise Men when word got out that Bill Miller had given not one, not two, but three homebuilders top-25 berths in Opportunity Trust. Sure, Pulte, Ryland (NYSE:RYL), and Lennar (NYSE:LEN) are all cheap stocks, but with everyone talking about a housing bubble these days, aren't these stocks doomed?

Funny they should ask. Philip Durell got the same questions when recommending mortgage market facilitator Fannie Mae late last year. And, actually, we agree with the critics -- housing prices are high and that market could decline. But if that risk has already been priced into a stock, and even with the risk the stock is still cheap -- then that's the time a value investor must pounce.

So Anheuser-Busch and Fannie Mae -- now you know two of our favorite companies. What will it be next month? Will we go on a drinking binge and buy Molson Coors (NYSE:TAP)? Or will we buy another mortgage company like Freddie Mac? There's only one way to find out. Click right here to sign up for a free one-month trial of Inside Value, and this time next month, you'll be reading about our latest undervalued investment long before the pinstripe-and-wingtips crowd has even begun looking.

This article was first published on Feb. 8, 2005. It has been updated.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article. The value of The Motley Fool's disclosure policy is hard to overestimate.