History shows that the stock market has been and can be beaten by those brave folks willing to buck the momentum herd and focus on fundamentals. The roster of those who are capable of delivering and sustaining market-beating investing results includes legends like Warren Buffett, Benjamin Graham, Peter Lynch, and Bill Miller. Time and time again, the folks who can beat index trackers like Fidelity's Spartan 500 Index (FUND:FSMKX) are those who are firmly grounded in value-investing principles.
My friend and colleague Philip Durell has studied these masters, their strategies, and their successes. As the lead analyst for Motley Fool Inside Value, Philip has seen his selections outpace the market's return (as measured by the S&P 500) by four percentage points since the newsletter's inception a little over a year ago. He has done so by profiling attractively priced global stalwarts like Coca-Cola (NYSE:KO), the world's best-known brand, rather than suggesting that subscribers risk their money on a biotech company like ImClone (NASDAQ:IMCL). ImClone's stock price is driven by its potential for the future -- not its actual results.
Why value wins
The reason Philip's selections have bested the market is simple. He, like the value greats that came before him, selects strong companies that are going through short-term tough times. Consider the saga of industrial air giant Praxair (NYSE:PX). In late 2000, the company could have been picked up for just $16.10 per stub. It was almost as if the market feared that air was going out of style. Recently trading hands at $48, the company has just about tripled since that discount was available. Mall operator Simon Property Group (NYSE:SPG) experienced a similar ride over that same period, when investors feared that the emergence of the Internet and e-commerce would eliminate the shopping mall. While these particular value opportunities arose before Inside Value was launched, these situations are exactly the sort of things that Philip looks to uncover for subscribers.
It sounds crazy, but such things happen all the time. Just last fall, Philip dug up title insurer First American (NYSE:FAF) at a time when the market feared that the company's future would be bleak, thanks to the expected slowdown in the housing market. Philip argued that First American was cheap on an absolute basis, regardless of the conditions in the housing market. Since he picked First American just over a year ago, the company is up an astonishing 55%, showing just how correct his assertion was.
The market is an emotional roller coaster. When things are going well for a company, its stock can get priced as though the good times will last forever. When things are going poorly, the market often overreacts on the downside, pricing an otherwise solid company as though its days are clearly numbered. Some would say that such irrational panic may be hitting super-regional banking powerhouse Fifth Third (NASDAQ:FITB) right now. After a series of lowered earnings announcements (because of a difficult lending environment), the bank's shares are some 43% lower than where they were a few years ago. Yet yield curves and quality spreads renormalize over time, and Fifth Third looks like it has the strength to persevere through this rough patch.
With an objective understanding of the worth of a business, confidence that the market will eventually sort itself out, and enough patience to wait out the process, value investors have beaten the market time and time again. At Inside Value, we're confident that history will repeat itself, and value will once again prevail.
Opportunity
knocks
Just after the market closes Wednesday afternoon, another issue of Inside Value will be released, and two more companies will join our list of potential market-beating, value-priced investments. Take a 30-day free trial now, and be among the first to discover what they'll be. With your trial, you'll also have access to everything we've ever published. You'll be able to take a look at our updated value chart for all of Inside Value's previous picks, and through back issues you can decide for yourself how much value remains in those selections. Click here to begin your free trial and start your journey toward replicating the market-thrashing success of history's greatest value investors.
This article was originally published on Sept. 14, 2005. It has been updated.
At the time of publication, Fool contributor and Inside Value team member ChuckSalettaowned shares of Fifth Third. Coca-Cola and First American are current Inside Value recommendations. The Fool has adisclosure policy.
