The teachings of the value masters -- Graham, Buffett, Munger, Ruane, Whitman -- are the first, last, and most important lessons to learn in investing. That's my humble opinion, anyway, and I think that by taking the time to truly appreciate the difference between value and price, we can all become better investors.

Warren Buffett is almost as famous for his aphorisms as he is for his incredible investing track record -- 40 years of better than 20% compounded annual growth using a value strategy. One of my favorite Buffett sayings is "Be greedy when others are fearful."

My debt to Mr. Buffett
I bought shares of Valero (NYSE:VLO) at the end of 2003 because I was confident that the company was undervalued by the market. As an asset play, its market cap represented a fraction of what it would cost to replicate its network of refineries. Moreover, Valero boasted substantial revenue growth and a price-to-earnings ratio (P/E) of less than 10 -- below the industry average. The company also benefited (and continues to) from a sizeable moat: Refineries are operating near capacity and it will take years to build more in the United States.

That value investment has been good to me. (I even recently tried to convince Motley Fool Inside Value lead analyst Philip Durell that it's still worthwhile at its current price!) That little piece of advice from Mr. Buffett, however, was what supercharged the investment.

Learn from fear
During Valero's recent upward trajectory, the stock would temporarily drop with a sharp rise in oil prices. The fear is that expensive oil will decrease Valero's margins, reduce demand, or just make for more plain old volatility. That fear, of course, is more about emotion than analysis. As oil prices rise, so too tends the crack spread -- the difference in price between raw and refined product -- which makes Valero more profitable. As long as you believe high prices are sustainable -- and I do, given increased global demand -- it's easy to stay bullish on Valero's long-term prospects, despite any short-term stock drops.

In other words, my research told me to buy. And buy I did, taking advantage of dips in the summer of 2004 and the spring of this year to add to my position.

This is not meant to boast, but to describe the profit power of value investing. I never expected Valero to appreciate so quickly; actually, I'd always thought in terms of its incredible long-term potential. At the stock's current price of approximately $110, a buy at $80 has been worth just a 38% return, while a buy at $65 has been worth a near 70% return. That's good food.

Get greedy for value
This strategy of waiting for the market to undervalue great companies is at the heart of The Motley Fool's market-beating Inside Value newsletter. To find opportunities, the team searches a number of market areas, including:

  1. Cyclicals. (See Valero example above.)
  2. Stocks near 52-week lows, as Wal-Mart (NYSE:WMT) and Take-Two Interactive (NASDAQ:TTWO) are today.
  3. Out-of-favor industries. Think back to Ameritrade (NASDAQ:AMTD) and Goldman Sachs (NYSE:GS) during the depths of the bear market.
  4. Scandal- or lawsuit-plagued firms such as Inside Value pick Fannie Mae (NYSE:FNM) or Merck (NYSE:MRK).

Foolish final thoughts
Value investing is the only time-tested investment strategy that works. Indeed, it's worked for Philip -- to date, his Inside Value recommendations are beating the market by seven percentage points. No matter what kind of investor you fancy yourself to be, the tenets of value investing can help you boost your returns. To see what all of the fuss is about, take a free 30-day trial to Inside Value by clicking here. You'll receive two value recommendations each month and enjoy access to everything the service has ever published.

Rest assured that when I sell my shares of Valero, I will tithe Mr. Buffett (or his favorite charity). While not the prototypical Buffett investment, I couldn't have pulled the trigger on Valero without having thought long and hard about his writings. But I don't expect to sell my Valero any time soon. Like Mr. Buffett, I've learned that the best time to sell a superior company purchased for a bargain price is almost never.

Tim Hanson owns shares of Valero, but no other companies mentioned in this article. Merck is a Motley Fool Income Investor recommendation. At the Fool, no writer is too cool for disclosure ... and Tim's pretty darn cool.