Invest Smarter

If you're like most of us, you're probably overworked. Have you ever asked your boss for help, only to be told that you need to work smarter, not harder? Yeah, me too. Yet as catchy as that phrase sounds, the boss never seems to have any concrete ideas on how you should do so.

It's a nice theory, of course. If you can figure out ways to be more efficient at your job, you can get the same amount of work done in less time. There might be dozens of ways to get the job done. The big problem, however, is that you're simply too busy doing your job to figure out ways to improve it.

Likewise, there are about as many ways to go about investing as there are investors. And some investors are simply far more efficient moneymakers than others. Those who've figured out how to do the job of investing well can get their cash to compound at a more rapid rate. In effect, they've figured out the secret to investing smarter, and they've reaped the rewards as a result. I'm sure you've heard of some of these greats -- Warren Buffett, Charlie Munger, John Neff, Walter Schloss, Bill Miller...

Their secret to success
All of these legendary investors share one thing in common. They follow a philosophy that a man named Benjamin Graham pioneered on the heels of the Great Depression. It's called value investing, and it's one of the most efficient ways to make money in the stock market. Fortunately, unlike our bosses who implore us to "work smarter" without giving any specific guidance, these greats have been exceptionally willing to share their investing secrets with the rest of us.

Their market-beating strategy can be summarized quite simply:

• Every stock has a true worth, based on its underlying company's earning potential.
• The market's price for that stock doesn't necessarily reflect that true worth.
• Eventually, however, price and true worth will cross paths.
• Therefore, you should buy a stock when its price is below that true worth and sell when it's above it.

It's a remarkably simple investing method that has trounced the market for generations. Better yet, as our market-beating results at Motley Fool Inside Value can attest, it still delivers on that promise today.

Why this still works
While value investing is based on straightforward principles that any investor can understand, there is one tricky bit to it: To know what a company's earning potential is, you have to be able to accurately forecast the future. As we all know, that's impossible. Yet that bit of impossibility is precisely what gives us our edge -- one that has stood the test of time.

Since we're all pretty lousy at prediction, it stands to reason that the stock market can be just as bad a predictor as any of us are. After all, the market price of a stock is nothing more than the price the last buyer was willing to pay and the last seller was willing to accept. What makes them any better at prognosticating than the rest of us are? Clearly, they couldn't agree on the future prospects of the firm, or else the seller wouldn't have sold or the buyer wouldn't have bought.

Value investors don't claim to be remarkably better at guessing the future than anyone else is. We do, however, understand that the market can be just as bad at it as the rest of us are. Our advantage comes largely from our willingness to ask the market a simple question: "Is your prediction reasonable?"

If the answer is yes, then we leave well enough alone. If the answer is no, then we make our move, based on the direction of the market's unreasonableness. If the market is projecting doom and gloom despite a fairly healthy overall company behind the stock, we buy. On the other hand, if the market is expecting perpetual sunshine despite the storm clouds forming on the horizon, we sell.

Market-beating results
Of course, what really matters is how well value investing works in practice. After all, the stock market is itself a tremendous wealth generator. If your investing strategy can't beat it by a large enough margin to justify your time, you'll probably be better off by simply indexing. To illustrate exactly how well value still works today, I'll share with you my own track record from the Fool's weekly "Dueling Fools" feature. In that feature, two Fools square off in an attempt to determine whether a company's stock is worth owning. I had the privilege of taking part in seven stock-specific duels in 2005. In choosing which companies I'd be willing to duel about and which side I'd take, I asked myself two simple questions:

• What does the market think?
• Is its prediction reasonable?

Essentially, I asked the same questions that any value investor would ask. Based on my answers, I made my picks and stuck my neck on the line in broadcasting my opinions to the world. These are my results.

That's a 71% success rate and a net 18-percentage-point performance edge in the metrics that really count: results versus the market. Even more strikingly, my smallest victory was by a larger margin than my largest defeat. Plus, I'll be the first to concede that Anheuser-Busch has done a superb job of addressing my primary concern at Duel time -- the stagnation of the beer market. Its recent acquisitions, proposed distribution arrangements, and new-product expansion plans have helped me understand that the business will likely still thrive well into the future. As such, I'll happily admit defeat there, joining Inside Value lead analyst Philip Durell in support of Anheuser-Busch.

Get started now
Simply put, the value investing strategy has worked for generations, and it continues to work today. Come join us at Inside Value, and you, too, can figure out how to invest smarter and make your money work harder for you. With your newfound financial independence, maybe you'll be able to tell your boss exactly what you think of those worthless buzzword-laden slogans that masquerade as help. Your 30-day free trial starts here.

At the time of publication, Fool contributor and Inside Value team memberChuck Salettahad no ownership stake in any of the companies mentioned in this article. Taser, Blue Nile, and XM Satellite Radio are Rule Breakers recommendations. Blue Nile and Buffalo Wild Wings are Motley Fool Hidden Gems recommendations. H.J. Heinz is an Income Investor recommendation. The Motley Fool has adisclosure policy.