Join the Right Team

Come join the zealots
And so, it ends. Face-paint sales skyrocket. Giant foam fingers emerge from closets. Air horns are concealed in pants. Tequila shots get hidden in innocent-looking film canisters. (Jell-O shots don't slosh, and are easier to sneak in. At least, that's what I'm told .)

Yes, tournament time is coming to an end, and we'll no longer see television shots of NCAA basketball fans crazily supporting their favorite teams. The college hoops tournament is probably the biggest festival of partisan behavior this side of soccer's World Cup.

Unless we count the stock market.

Or maybe not
Drop by the message boards for stocks like XM Satellite Radio, rival Sirius, Apple, Overstock.com, or Intel and AMD. Read a few posts. Now tell me there aren't a few people out there typing in their messages while sporting face paint in company colors. Maybe that's a stretch, but you just know some of these people are TYPIGN THERE ALLCAPS POsTS with their brains on pause, spraying obscenities across their monitors.

And that's a problem.

No investment pays dividends on your love or loyalty. Just as the guy with the painted chest in seat 43D, Balcony C means zilch to the superstar on the court draining threes, so we investors really are just shmoes with excess capital to allocate. If we're putting money down on a company and we want to see it win, we'd better base our decision on the odds we can get and the team's real strengths. We get no advantage simply because we live in the same state, like the school colors, or dig the way the coach throws chairs onto the court when things don't go his way.

Keeping a cool head
Some of us learned this lesson a long time ago (often the hard way.) And that's why we value types -- otherwise known as "investors" -- believe you should cultivate a healthy indifference for your companies and seek out all the information you can, especially that which moderates or even contradicts your point of view.

That's not to say we don't have a little fire in our bellies. At Motley Fool Inside Value, our local value club, we're passionate about a few things. One of them is not giving in to our passions. We don't take fliers on "the next big thing," because we realized that no matter how much we love stuff like KrispyKreme donuts, the company itself might be a complete dog for shareholders -- as that one most certainly was.

We take the opposite tack. We're passionate about looking for companies that the Street no longer loves. Hated is great. Ignored is good. We've even got an entire discussion board devoted to member suggestions for value stocks worth watching. (In fact, stocks that appear there sometimes become official recommendations later.) Over the past few months, our watch list and interest board have featured some informative dialogue about stocks such as these:

Back to basics
We're old-school. Pivot, bounce pass, line sprints? We look at boring fundamentals like the P/E ratio. Not so much as an indicator of worth, but as a shorthand price tag to compare with industry averages or prior time periods. When we see the market discounting a firm from its usual P/E ratio, it gets us thinking. Is the discount fair and reasonable? Or is it an overreaction to a temporary blip in sales or earnings?

There's a little something else that gets us out of our seats at Inside Value: We like to run the numbers. We look at returns on equity and capital (the last two columns above) because they give us an inkling of how well (or not) a company has utilized the money forwarded it by shareholders and lenders. And we tend to look for companies that have been around for a while, so that we can judge whether or not those returns are meaningful and sustainable. We love to find a company with a rock-solid brand and stable cash flows, because that allows us to run a discounted cash flow (DCF) valuation and see what its intrinsic value might be. If the current stock price is at a big discount to what we feel the real worth is, we tend to want to buy.

No fanfare. No cheerleading. In fact, we usually prefer to see a good business get cheaper, even if that means watching our first position go underwater. That's because we've done the math. We're pretty certain we know what the company is worth down the road. In the meantime, we'll take the bigger bargain, thanks.

As you know by now, the final thing we're passionate about is price. Quality doesn't matter if you pay too much. Take my shares of American Eagle Outfitters as an example. I've got some that are still underwater. Great company? I think so, but only the shares I bought during last fall's bloodletting have made me money. Same company. Same shares. The price is the only difference.

That's why the bottom line for the value team is always, "What's the discount?" We know enough to know that our seemingly-precise DCF valuations are only as accurate as the assumptions we've made. So we always look for a "margin of safety." We'll take as big a markdown as we can get, though for premium companies like 3M, 15% might be good enough. The margin of safety protects us when we're wrong -- because eventually, it will happen. But when we lose, we don't fall so hard.

Final buzzer
The value team might seem the most boring squad around, but that's an undeserved reputation. Value investors get still get their share of exciting quick-doublers -- as Inside Value investors saw with Omnicare -- and droppers, like we got with Doral. Sometimes we do need to buy before it's too late, but most of the time, we have plenty of opportunity to play our strongest game.

The goal of the smart, defensive, value style of play is consistency. Investing is not about assembling a crew of hotshots for momentary glory. It's a long process toward building an unstoppable dynasty. If you'd like to see more about how the Inside Value team does it, you can play ball with us for a month, on the house.

Seth Jayson was always a crummy outside shooter, but his pointy elbows were feared across the Midwest. At the time of publication, he had shares of 3M, American Eagle Outfitters, and Doral, but no positions in any other firm mentioned. View his stock holdings and Fool profile here . 3M is a Motley Fool Inside Value recommendation. XM is a Rule Breakers recommendation. Fool rules arehere.