The tagline for Mattel's (NYSE:MAT) classic board game Othello reads "A minute to learn, a lifetime to master." In a nutshell, that phrase means that the rules of the game are quite simple to grasp, but becoming an expert takes significant time and experience. In truth, the same thing can be said about successful value investing. Just like in Othello, the rules of successful value investing are simple, but mastering them takes a concerted effort.

The practice of value investing began when Benjamin Graham set out a few straightforward principles in his seminal book, The Intelligent Investor. Graham's writing has withstood the test of time, the boom and bust of market cycles, and the onslaught of academic theories like the Efficient Market Hypothesis. Yet through it all, generations of investors have profited from his teachings, consistently delivering long-term results dramatically higher than those provided by the market trackers like the S&P Depository Receipts (AMEX:SPY).

Graham's rules are so simple, in fact, that they hardly seem like rules at all, and more like a dose of good old-fashioned common sense. In summary, they are:

  • Estimate a fair value for the company.
  • Buy only if the company's market price is significantly below that value.
  • Look for a strong dividend policy as a sign of financial strength.
  • Diversify appropriately to spread your risk.

It's a time-tested strategy that still works today, and one that my friend and colleague Philip Durell has used with great success as lead advisor for Motley Fool Inside Value.

The siren song
This, of course, begs the question: If the rules that allow individual investors to beat the market are so simple, why isn't everyone following them? Well, in a word, greed. Every few years, a new whiz kid comes along, with extremely rapid growth rates and a skyrocketing stock. Visions of quick riches dance before the eyes of those who are unwilling to wait for value investing to work its magic. Currently, Internet search and email juggernaut Google (NASDAQ:GOOG) is wowing speculators with visions of dollar signs, thanks to rapidly rising earnings and a stock that has more than tripled since its IPO last year.

Yet, always and forever in a dynamic economy, profit brings competition. And the higher Google's profits are, the larger the incentive becomes for competitors like Yahoo! (NASDAQ:YHOO) to step up their efforts to grab a larger slice of the pie. Even if Yahoo! -- or any other company -- fails to dethrone Google, the competition will drive down margins and provide alternative venues for the advertisement dollars that are fueling Google's current surge.

If competition fails to do the trick, rapid growth is itself usually unsustainable. Sugary sweet KrispyKreme Doughnuts (NYSE:KKD) learned that the hard way, as its aggressive growth plans led to serious overcapacity and the eventual collapse of the company's financials. So bad are things at the doughnut giant, in fact, that a wholly owned franchise subsidiary of the firm recently filed for bankruptcy protection. The dangers in projecting rapid growth forever are immense; either internal or external pressures or both will cause a slowdown. Any company whose value depends on sustaining long-term rapid growth is at an incredible risk of seeing its share price crumble as soon as the company strays from that path.

Reasonable growth does matter
Despite problems associated with expecting too much growth, business improvement over time is a critical part of any investor's analysis of a company. In fact, when looking to buy a firm, its future prospects are the sole reason to bother investing. For the vast majority of companies, including behemoths like banking giant Citigroup (NYSE:C) and its $200+ billion market capitalization, a company's growth prospects make up a substantial majority of its current value.

What has happened in the past may be a guide, but there's certainly no guarantee. For instance, oil giants like Chevron (NYSE:CVX) may look cheap in the rearview mirror, based on the tremendous profits they've reaped thanks to the recent spike in energy prices. But its earnings are inextricably tied to the price of crude oil. Fortunately for those of us who drive, but unfortunately for oil stock investors, the price of crude is finally wafting back down from its recent highs. And so are the stocks of those companies whose profits depend on a high oil price for their profits. The recent past may have been spectacular, but it's what the future is expected to bring that counts.

Unfortunately, we don't have a crystal ball. Therein lies the rub: With no certainty about what will happen, predicting growth rates and using them to value a company becomes little more than an educated guess.

Experience counts
Though there is no certainty in predicting the future, there is a plethora of information available for investors to use in determining growth rates. The relevant data include:

  • The overall expected growth in the economy.
  • The strength of the moat protecting the company from competition.
  • The expectations for the future of the markets in which the firm competes.
  • The recent financial performance of the business.
  • The integrity of an enterprise's management.
  • The business and commodity cycles and their impact on the company's operations.

And that's just the tip of the iceberg. Even the most robust spreadsheet cannot contain all the factors that affect a business and its potential growth. And even if one could contain all that information, the answer it would spit out would still be determined by the assumptions and presumptions put into the model. If the assumptions are wrong, the answer will be, too. That's where experience factors in. With experience, you can learn how to answer the all-important question of "What's reasonable?" And with that question answered, fixing a true value to a company becomes a far more achievable goal.

The true power of Inside Value comes from that experience. Lead analyst Philip Durell has some 37 years of investing under his belt. That's enough time to have "been there, done that." Through experience, he has learned how to determine reasonable valuations for companies and how to profit from those times when the market gets it wrong.

The journey of a thousand miles begins with a single step. Click here to start your risk free 30-day trial to Inside Value and begin gaining the experience you'll need to become a market-beating value investor.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Mattel. Mattel is an Inside Value pick. The Fool has a disclosure policy.