My friend and colleague Philip Durell has done what many academics view as impossible: His Motley Fool Inside Value newsletter has outpaced the S&P 500 for well more than a year. Since its inception, subscribers have seen some 12.28% growth from its picks, whereas the S&P 500 has risen only about 7.99%. 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, and 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, the call of cash 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.
Real-world examples
About a month after I bought shares of credit-scoring giant Fair Isaac (NYSE:FIC) at $34.06 a stub, it announced larger-than-expected troubles in its software business. That announcement knocked it down to $24, providing a substantial discount to what was an already good price. Yet as time passed, the company's operations have improved, and its shares have recovered. With shares recently trading hands at $44.33, I've seen about a 30% gain on my investment. Had you followed me in later, you could have seen a gain as large as 84%. For reference, since my purchase in June of 2004, S&P 500 trackers like the SPDRs (AMEX:SPY) have risen only about 15% -- about half my return, and less than a fifth of what you could have seen had you bought after I did.
This is not a one-time fluke. I've previously profiled my investment in insurance company Presidential Life (NASDAQ:PLFE). While my total cost was $14.15 a stub, you could have bought it a few months later for as little as $12.29. At a recent price of $22.14, we've both made money. Of course, your potential 80% return for purchasing later would still have left me in the dust.
I'm not the only one who finds such companies, either. On Aug. 17, 2004, Inside Value subscriber Grit29 pointed us toward money management firm Janus (NYSE:JNS), then trading at $13.20 a stub. A few months later, in April 2005, those same shares could have been picked up for as low $12.75 each. With shares at a recent price of $22.17, Grit29 has absolutely left Wall Street in the dust, but once again, you could have done even better by watching and waiting for an even better price.
Inside Value subscriber tengen pointed out that enterprise software company Geac (NASDAQ:GEAC) looked attractively priced on Nov. 12, 2004, trading at $7.15 a stub. Less than a month later, the discount was even larger, and the firm changed hands at $6.70. With a current stock value of $10.97, tengen's 53% return has whipped the market, but that still trails the better than 63% that someone could have earned by investing after the value had already been recognized.
Inside Value
picks are no different
I said that you could beat Philip's market-beating returns, and I meant it. Take his recent selection of cash advance firm Advance America (NYSE:AEA). Philip's cost from last September was $13.70, but you could have bought it for as little as $11.58 in November. While it currently shows a market-beating return for the Inside Valuescorecard (available to subscribers only -- click here to start a free 30-day trial and have a peek), you could have done even better. You had the luxury of taking your time, critiquing his logic, and analyzing the business for yourself -- and buying in at an even lower price.
You also had ample opportunity to beat Philip with discount retailer Dollar Tree (NASDAQ:DLTR). The Inside Value price of $24.43 last July was a discount to the firm's true value. That didn't stop the market from letting you buy it for as low as $20.56 last October, about three months after it was picked. Once again, you could have paid even less at a later date for what has turned into a market-beating investment.
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 not only will we knock $50 off the regular Inside Value subscription price, but you'll also receive a copy of value pioneer Benjamin Graham's masterpiece The Intelligent Investor as well as the Fool's Stocks 2006, absolutely free.
This article was originally published on Dec. 21, 2005. It has been updated.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Fair Isaac and Presidential Life. The Fool has a disclosure policy.
