Shot Through the Heart

The stock market is a cruel place. Aside from Uncle Sam, nobody cares what you paid for your stock or when you bought it. Even then, our favorite Uncle cares only enough to be able to take his share, should you manage to profit from your investment. When you buy a share of stock, you need to accept that inherent cruelty. At any given time, a share of stock trades for the amount that a willing buyer offers and a willing seller accepts. Past prices have no bearing on future prices.

Just ask the people who bought Internet search titan Google (NASDAQ:GOOG) near its January high of $475, thinking it would go higher, what they think of their $365 company in early March. On the very day Google hit its pinnacle, I warned that its shares were "priced to perfection" and that "any stumble in its growth trajectory [would] likely take its stock tumbling down with it." In truth, the timing of that statement was pure luck. The sentiment behind it, however, was based on a clear, value-focused investment philosophy -- the kind of strategy followed by value guru Philip Durell at his market-beating Motley Fool Inside Value newsletter. Yesterday's prices have no bearing on the long-term worth of a company. What matters over time is where the company trades compared to what it's worth. Buy too high, and you'll most likely lose money. It's cruel, but it's the truth.

Your portfolio's body armor
The same day Google peaked, Philip announced his selection of steel giant Mittal (NYSE:MT) to Inside Value subscribers. He argued that even as a cyclical business in a commoditized industry, the company was dirt cheap. Sure enough, he was right. Since that fateful day, witness the performance of Mittal versus both Google and Vanguard's Total Stock Market Index (FUND:VTSMX):

To quote master investor Warren Buffett: "Price is what you pay. Value is what you get." When you pay a low price for a company, you end up with more than you had when you started. It's as simple as that. A word of caution -- while this is a real-world example, the value equation doesn't always work out this quickly. For instance, it took just about a year before the market realized the value in Philip's Inside Value pick of British bank Lloyds TSB (NYSE:LYG). It is now easily outpacing the market, but it did languish until its true worth was finally understood. All in all, the Inside Valuescorecard is readily beating the S&P 500, up 12.14% vs. 8.32% for the index. Time and time again, value wins in the long run, though the near-term ride may be rocky.

Learn to let go
Of course, there's a flip side. Buying too high will cost you, but holding on to a company too long also means you'll likely end up keeping less than you could. Either an overpriced company will eventually fall to Earth, or you'll miss opportunities by holding on to companies with little reason to move. For instance, look what happened when former Inside Value pick GTech (NYSE:GTK) announced that it would be acquired by Italian firm Lottomatica. Philip recommended a sell, because the acquisition offer put a cap on the price that GTech could reach. As the stock approached that level following the buyout news, there was simply no reason to hold on any longer. With more potential Inside Value selections out there trading for less than they were worth, why hold onto a company with nowhere to go?

The Foolish bottom line
If you want to make money investing, you have to understand that the market doesn't care how much you paid for a stock. All that matters over time is what the stock is worth, compared to where it happens to be trading. Buy significantly below that level and sell well above it and you'll do just fine. If you lose sight of what really counts, you risk watching your hard-earned investments get shot through the heart by a cruel and uncaring stock market.

Are you ready to protect your hard-earned investing money by learning how to buy low and sell high with value? Click here to start building your portfolio's body armor with a 30-day free trial to Inside Value. Subscribe today, and we'll not only knock $50 off your subscription price, but also send you a copy of Benjamin Graham's The Intelligent Investor absolutely free.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta had no ownership stake in any of the companies mentioned in this article. The Fool has a disclosure policy.