Start Investing Successfully Today

The absolute best time to begin implementing your winning investing strategy is the day you draw your first paycheck. By socking aside some cash in the stock market every payday and letting the power of compounding work its magic over decades, it becomes almost trivially simple to end up on top. Of course, if you're like most of us, that first paycheck has long come and gone. As a result, the opportunity to simply let your investments compound throughout your career is rapidly drifting away.

Fortunately, all is not lost. While the absolute best time to begin may have passed, your next best opportunity is today. Your first paycheck may be behind you, but you've still got the rest of your life ahead. Without the benefit of your past to devote to compounding your money, however, you'll need a bit more from an investing strategy than simply buying the market and letting it run. You've got to start focusing on not just meeting the market, but beating it as well. A few well-chosen stocks supplementing your long-term strategy can help give your portfolio the boost it needs to make up for lost time.

Quite frankly, the market has been beaten for generations by those who've known what they've been doing. The trailblazers of Wall Street include greats like Benjamin Graham, Warren Buffett, Walter Schloss, and Bill Miller. They've left us with a clear path to follow in building our own market-beating portfolios.

Beating an imperfect market
The strategy these greats have all followed is known as value investing. Here's how it works:

1. Figure out what a company is really worth.
2. Determine how much the stock market is asking for the business.
3. Invest based on the difference between No. 1 and No. 2.
4. Wait for the market to realize and correct its mistake.

That's all it takes. It's a radically straightforward approach that still regularly crushes Wall Street, and it's exactly what we do at Motley Fool Inside Value. There's no magic involved. The toughest part is coming to grips with that first step, since you're essentially claiming that your analysis of the business is better than the market's.

No matter what the academics say, the stock market doesn't predict the future any more than my broken crystal ball does. At its best, the stock market reflects the aggregate consensus opinion of all its participants. And like any other mob, it's often wrong.

Noise in the system
Here's why many people believe the market is unbeatable: While it's often mistaken, it can be wrong in either direction. Sometimes it's too optimistic about a firm's future. Other times, it's too pessimistic. On average, over time, and across multiple companies, however, it tends to be about equally wrong in both directions. As a result, the errors largely cancel out over time, providing the illusion of an accurate forecast on average. In other words, "two opposite wrongs make a statistical right."

To illustrate, here's a chart with a series of real-world returns from a handful of companies over the past year:

On average, this portfolio returned a shade more than 15%. That's not too far from the often-quoted long-run stock market return rate of roughly 11%. Note, though, that the closest any individual stock in this group came to that average return was H&R Block's negative 4.28%. While the collection as a whole did about average, no single stock in the group returned anywhere near that level.

The value advantage
By focusing on the operating businesses behind the stocks, you can better determine when the companies look cheap, expensive, or properly priced, based on their potential. For example, you could very likely have predicted Gannett's problems, based on the long-running general malaise surrounding the newspaper industry. On the flip side, Advanced Micro Devices' sustained performance and price advantage were clear signals that its business would be rebounding. As an investor, you didn't have to buy all the companies on that list. You could simply have focused your money on the ones where the business looked stronger than the stock price reflected. By investing there and ignoring the rest, you could very well have improved your returns.

Because the market so often gets its predictions wrong for any given stock, it creates tremendous opportunities for those of us who've learned to look for those chances. Simply put, we find and buy those businesses where the market's sentiment has turned overly pessimistic. By becoming owners, we then benefit when the market's next mood swing shifts the stock from the doghouse to the penthouse.

For instance, I currently own Impac Mortgage, but I bought after its fall from grace. The ugly interest rate environment had knocked its business model for a loop, taking the stock down with it. Now that the yield curve seems to be renormalizing, its business should have a decent chance of recovering. I didn't happen to catch the absolute bottom of the stock, but I did miss out on the vast majority of the descent. While those who've owned it for that whole year may be feeling significant financial pain, those of us who bought during the panic sale are doing far better.

At Inside Value, we're constantly looking for companies whose shares have been unfairly discarded by an upset market. Whenever a business appears significantly stronger than its share price would indicate, we pounce. Then, we simply wait for the market's tantrum to end and the stock to return to a fairer value. As it has for generations of investors before us, it's still working today, delivering market-beating returns.

Get started now
If it's been some time since you've cashed your first-ever paycheck, today really is your best day to begin your successful investing program. We've recently released the newest issue of Inside Value. In it, lead analyst Philip Durell reveals two companies that currently meet his strict, value-investing based investing criteria. Want to discover Philip's newest picks? Click here to be my guest free for 30 days. Subscribe today, and you'll also receive Around the World in 80 Minutes, the Fool's report on international investing, absolutely free.

This article was originally published on April 13, 2006. It has been updated.

At the time of publication, Fool contributor and Inside Value team memberChuck Salettaowned shares of Impac Mortgage. Sara Lee is an Income Investor recommendation, while XM is a Rule Breakers pick. The Fool has adisclosure policy.