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 the SPDRs (AMEX:SPY) 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's selections have easily outpaced the market's return (as measured by the S&P 500) since the newsletter's inception a little over a year ago. He has done so by recommending attractively priced global stalwarts like Microsoft (NASDAQ:MSFT), the world's largest software company, rather than suggesting that subscribers risk their money on a biotech company like Acusphere (NASDAQ:ACUS). Acusphere'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. Like the value greats who came before him, he selects strong companies that are going through short-term tough times. Consider the saga of industrial pipeline giant Kinder Morgan Energy Partners (NYSE:KMP). A spinoff of Enron (yes, that Enron) managed by a former Enron executive, it certainly had its share of headline risk. Yet any data-driven investor willing to look beyond the panic-stricken headlines would have been thrilled to uncover this energy distribution giant, trading at deeply discounted prices. In the past four years, from Dec. 10, 2001 through Dec. 10, 2005, investors have seen a positive total return of 74% on their investments. That's not bad for a company with the heritage of this one.

It sounds crazy, but such things happen all the time. Last fall, Philip dug up long-distance giant MCI (NASDAQ:MCIP), the company that emerged from the ashes of the WorldCom scandal. The firm certainly had a checkered history, and there's no doubt that it was a dinosaur in a rapidly obsolescing industry. In spite of that, Philip made a compelling argument that the business was simply too cheap to pass up. Verizon (NYSE:VZ) thought so too, offering to buy up the entire company some six months later, for a very hefty premium to the Inside Value price.

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 mortgage trust AnnalyMortgage Management (NYSE:NLY) right now. The company's determination not to hedge its mortgage portfolio saves investors money in the long run. Currently, however, the ugly lending yield curve is suppressing the business' profits and dividends. Consequently, its shares are trading near their book value. Given that most of the firm's assets are AAA-rated mortgage bonds, being near book value may well represent a good floor for the stock.

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 this 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, 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 Microsoft, Annaly Mortgage Management, and Kinder Morgan Management -- a related company to Kinder Morgan Energy Partners. Annaly Mortgage is an Income Investor pick. The Fool has adisclosure policy.