Your Keys to Trouncing the Market

As an individual investor, you have a tremendous opportunity that the largest institutions only wish they had. You can do what, as a whole, they cannot. Simply put, your investments can beat the market's indexes. You have two tremendous advantages over the Wall Street behemoths, size and time. If you learn to exploit the professionals' weaknesses in those arenas, your portfolio can grow much faster than their mutual funds can.

Of course, to do this, you need a plan. And not just any plan will do. In order to beat the market, you need a plan that has two key elements: a winning strategy and personal compatibility. Both are critical for your success. If you have one but not the other, you run the very real risk of making the same kinds of bad decisions that ruin so many of the giants of the mutual fund industry.

Emulate success
Since you need an investing strategy that has a real shot of succeeding, why not consider following in the footsteps of multi-billionaire investor Warren Buffett? He made his billions following a simple strategy laid out by his professor and mentor, Benjamin Graham. That strategy today is known as value investing, and it's precisely what we do at Motley Fool Inside Value.

The concept is simple. Every company has a fair value. That fair value may have nothing whatsoever to do with what the stock market claims is an appropriate price. Instead, investors figure out that fair value by estimating how much cash the company will make, then dialing back those future earnings to what they're worth today. Add together all those dialed back earnings, and the result is the true value of the company. It's called a "discounted cash flow" analysis, and it's the primary technique behind value investing. So critical is it, in fact, that Inside Value has an online calculator here that will do the math for you. (Not yet on board? Click here to start a 30-day free trial and kick our tires.)

Once you've determined what the company is really worth, you compare it to what the market says it is worth. If the stock is significantly on sale, you buy. If the stock has gotten radically overpriced, you sell. Benjamin Graham called such a search for discounts "the Margin of Safety," and accurately portrayed it as the lynchpin for successful investing. It's not rocket science, but it does beat the market.

Do right by yourself
Even though value investing works, it still needs to be right for you if you plan to make money following that strategy. Simply put, the market has a mind of its own. This is especially true in the short term. Just because you think a stock is cheap doesn't mean the market does. Usually there's a reason why a stock is trading down in the dumps and available at a discount. It may take a while for the market to realize the true worth of the firm. In the interim, until that oversight is corrected, a cheap stock may very well get cheaper.

As a result, to be successful as a value investor, you have to be objective, confident, and patient. You need to wait for the market to discard its emotions and catch up with reality. It can be difficult to sit and watch your value-priced investment get an additional discount. If you've got what it takes to wait it out, the market eventually wakes up to its mistake. To illustrate, here are a couple of real-world examples from the pages of Inside Value:

The value strategy worked. Even so, an investor who was not comfortable with following the philosophy could easily have panic sold near the lows. This is why it is absolutely critical that you be comfortable with your investing strategy. Your profits depend on it!

Success stories abound
By adhering to the value principles first laid out by Graham, anyone can become a successful investor. To illustrate, here are a handful of value stocks suggested by Inside Value subscribers, along with just how well they've performed since being picked:

There was no mythical guru status required. It just goes to show: the two things it takes to beat the market are a successful strategy and an investing philosophy that you're comfortable implementing. Find what works for you, and you too can count yourself among the ranks of those who've tamed Wall Street.

AutoZone is a Motley Fool Inside Value selection. La-Z-Boy is an Income Investor recommendation.

Think value investing might be your ticket to beat the market? Click here to start your 30-day free trial to Inside Value and find out for sure. Subscribe today, and we'll not only knock $50 off Inside Value's regular subscription price and give you access to the Fool's Stocks 2006, but we'll also include a copy of Benjamin Graham's value investing masterpiece, The Intelligent Investor, absolutely free.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Omnicare. The Fool has a disclosure policy.