Invest Like You Need the Money

There are two ways to make a living in this world:

1. Earn an honest day's wages for an honest day's labor.
2. Put your cash to work for you.

Of course, the old saying is true -- you have to have money before your money can make money. Thus, most of us work for a living.

Just because we have to work now, however, doesn't mean we're stuck forever. You can make your way from the labor side by regularly investing. If you're like me, though, life often finds a way of getting between you and your best intentions to stash away cash for the future. That's OK. It happens to the best of us. All it means is that we have to figure out the best uses for the money that we can stash away.

Bang for your buck
For my money, value investing is that best use. Value investors like Warren Buffett, Charlie Munger, and those of us at Motley Fool Inside Value are the stock market's bargain hunters. We're looking for companies trading for less than they're actually worth, and when we find them, we buy. Our money goes a lot further when we're paying $0.80, $0.70, or even just $0.50 for a dollar of value.

The businesses we end up buying may not be the hottest names on Wall Street -- but that's the point. We take advantage of Wall Street by buying where it won't. And in the end, all that matters is that our investments beat the market -- which they generally do, according to historical data from Fama and French.

In fact, as the below data shows, you often end in a better position by ignoring the outlandishly priced next big thing and instead homing in on proven (albeit boring) moneymakers trading at value prices.

The Next Big Things (all data split-adjusted)

Boring Cash Generators (all data split-adjusted)

In the battle between computer networks (Cisco) and oil pipeline networks (Kinder Morgan), the real transport company beat the virtual one, hands down. The mall (Simon Property) easily bested the supposed mall-slayer (Amazon.com). And when it came to communications, even the now-defunct telegram (First Data) positively trounced digital radio (XM Satellite Radio).

What happened?
The reason the old-world legacies trumped the high-tech upstarts is simple. The Next Big Things were priced to perfection. They were trading as though their explosive growth would last forever. The Boring Cash Generators, on the other hand, were priced as if they were dead and waiting to be torn apart by vultures.

In the expectations-driven world of Wall Street, the Boring Cash Generators prove that it's a lot easier to win if you can blow past those expectations by simply staying alive.

Digging for the next discounts
Of course, the past is past. The above cash generators, once left for dead, are now viewed as much healthier enterprises. Accordingly, their stocks have recovered nicely, and they can't help you if you want to invest today.

A value strategy -- like the kind we use at Inside Value -- can help you invest today. We use discounted cash flow (DCF) analyses to determine what companies are truly worth. It's a straightforward method by which a business is valued based on nothing more than its real-world potential to throw off cold hard cash. So critical is the DCF to our way of thinking, in fact, that Inside Value has an online calculator here that'll do simple estimates for our subscribers (a guest pass is required for non-subscribers).

Simply put, the more cash a company can create, the more it's really worth. That's true no matter what Wall Street happens to think of its stock at the moment.

The Foolish bottom line
There's only so much money left at the end of the month. If you really want to get to the point where your money works hard enough so you don't have to, you need to invest what you have as efficiently as you can. The more cash-generation ability you buy with each invested dollar, the better off you'll be.

Do you want to find out which inexpensively priced money-making machines Inside Value subscribers are snapping up today? Click here to be my guest for 30 days. Subscribe today and we'll also send you Around the World in 80 Minutes: The Motley Fool International Report absolutely free.

At the time of publication, Fool contributor and Inside Value team memberChuck Salettaowned shares of Kinder Morgan Management, a related company to Kinder Morgan. First Data is an Inside Value recommendation. XM Satellite Radio is a Rule Breakers recommendation. Amazon.com is a Stock Advisor recommendation. The Fool has adisclosure policy.