My friend and colleague Philip Durell has done what many academics view as impossible. His Motley Fool Inside Value newsletter has easily outpaced the S&P 500 for well more than a year. Since inception, subscribers have seen some 9% growth from its picks, whereas the S&P 500 has risen only about 6.2%. Philip has surpassed the index by following in the footsteps of generations of market-beating investors -- through the straightforward application of value principles.
The concept is simple. Look for a company trading well below its true worth. Buy it, then wait for the stock market to realize it has given you an unfairly low sale price. Once you're an owner, hold on as the business grows over time. If, however, the company later ends up trading well above its true value, sell. Lather, rinse, and repeat for long enough, and you too will likely soon find yourself well ahead of the pack.
Your extra edge
There is a catch, but it's something that you can exploit. Value investing, while a time-tested way to outperform the market, does not and cannot call the absolute bottom in a stock. Instead, it's all about comparing what the stock market thinks might happen to what cold, hard cash says is actually happening. And while the stock market may squawk loudly, cash's call is usually far clearer in the long run. Because of that dynamic tension, companies may still continue to drop even after value investors swoop in for their discounted purchase.
Once a month, Philip lays out the case for two companies to Inside Value subscribers. While both of them look to be trading well below where they should be, the odds are pretty low that they'll both choose the exact instant of publication to bottom out entirely. Yet it's the price at the time of publication that gets tracked in the scorecard. As often happens, the market subsequently moves those value-priced companies further down, making them even cheaper. As a subscriber, you get the inside scoop on two deeply discounted companies a month. You also often get the chance to buy them at an even better price after you've had the chance to verify their worth for yourself.
Early on, Philip issued a challenge for subscribers to find an undervalued company. My entry was homebuilder Lennar
This is not a one-time fluke. Last February, I uncovered specialty grain producer and alcohol distiller MGP Ingredients
I'm not the only one who finds such companies, either. On March 18, 2005, Inside Value subscriber yttire pointed us toward Ceradyne
Inside Value subscriber lostpros pointed out that Cigarette giant Altria
picks are no different
I said that you could beat Philip's market-beating returns, and I meant it. Take recent selection Rent-A-Center
You also had ample opportunity to beat Philip with British mortgage banking giant Lloyds TSB
Your opportunity still exists
Although the newsletter itself is handily beating the market, not every pick has followed suit. As of this writing, there are still a handful of Inside Value recommendations that are trading below their pick prices. You can review Philip's research, supplement it with your own, and then make the decision for yourself. That, my friend, is how you can beat the guy who is beating Wall Street. Click here to get started. Subscribe today, and you'll also receive a copy of Stocks 2006, the Fool's guide to investing in the year ahead, absolutely free.
This article was originally published on Dec. 21, 2005. It has been updated.