Knock the Cover Off the Ball

Imagine a baseball game where the batters simply could not strike out. They could sit there, waiting for their perfect pitch before swinging. And when they did swing -- well, it would look something like the home run derby before the All-Star Game.

For value investors, the stock market acts much like that mythical baseball game. The fact is, you can stash your cash in a money market fund and wait for that perfect company to come along at just the right price. You can sit there all day and let company after company pass you by, until you find your perfect opportunity. By putting your money to work only in those businesses that are truly on sale, your dollars can buy more of a firm than they otherwise should have. And when those sales end -- when your companies jump back to their true values -- you benefit by seeing your shares come along for the ride.

Bonus returns
Here's how you benefit. Say you have $1,000 to invest. Say, too, that you agree with Motley Fool Inside Value analyst Philip Durell that beer giant Anheuser-Busch (NYSE:BUD) is really worth $58 a share -- despite its recent share price of $41.80. If the King of Beers were trading at Philip's $58 a share, you could afford to buy about 17 shares. Since it's trading substantially below that amount, your $1,000 could buy more -- a total of 23 shares, in fact.

Watch what happens if and when the market realizes that a $58-a-share company is on sale for $41.80: The 23 shares originally bought on the cheap for $961.40 would then be worth $1,334. That's a 38.8% pop from the purchase price, and it's way above what you would have had if you had bought the stock at its fair value. Those six extra shares simply sweetened the pot and made your gain that much nicer. Not only that, but that 38.8% gain would come simply from Anheuser-Busch's return to fair value. As an owner, you'd also benefit if the fair value increases over time.

Of course, you may be asking, what is the right price to buy? At Inside Value, we use the concept of a "margin of safety" to tell us when the price is low enough. In a nutshell, we look at the difference between the company's market price and its true worth. Obviously, the larger the sale price the market is handing us, the better. In general, a discount of 20%-25% is enough to whet our appetite and get us to seriously consider swinging for the fences.

Wait smart
Of course, the trick is finding companies that happen to be trading for less than they're worth. Everyone in the market is looking to make that kind of easy money. Unless you were lucky enough to get in on Chipotle's (NYSE:CMG) severely underpriced and red-hot IPO, though, easy-money bargains can be rather tough to find. That's why it's important to have a watch list -- a group of companies that you'd love to own, if the price were right.

With your watch list, you simply jot down a few firms you want to own, along with the price you'd be willing to pay to buy them. When setting your buy price, place it a bit below what the business is really worth. That way, you can wait for the perfect fat pitch to come around, which will let you knock it out of the park. After all, since you'd be paying less than the business is worth, you'd get the stock's rebound to fair value to help you turbo-charge your results.

Inside Value uses just such a watch list to find the right companies at the right price. In fact, several official newsletter selections are graduates from that watch list. They were companies that looked interesting, but simply weren't cheap enough to buy when they were first uncovered. As Inside Value's market-beating returns illustrate, finding the right company isn't enough. It has to be the right company at the right price.

I won't tell you which ones have graduated to official selections; you'll have to take a free trial to see those. I will, however, let you in on a few that are still hanging around the watch list, waiting for the price to be right.

See what I mean? To be worth purchasing, it has to be the right company, trading at the right price. Even a superb firm trading at too high a price can cost you money as an investor.

The Foolish bottom line
As a value investor, there's no such thing as a called strike. You can sit in your money market fund and wait for as long as it takes. Once you find the right business trading at the right price, though, go ahead and swing for the fences. You just might knock the cover off the ball.

Are you ready to look for your perfect pitch before investing? Click here to get started with Inside Value and learn how to spot your opportunity to hit one out of the ballpark.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.