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 such as 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 and academic research from the likes of Fama and French.

In fact, as the tables below show, 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 information search and retrieval methods, the telephone directory (RR Donnelly) beat the Internet directory (Yahoo!), hands down. When it came to powering our world, old-fashioned oil (ExxonMobil) trounced new-fangled power cells (Ballard Power). And in the entertainment arena, the venerable Barbie Doll (Mattel) positively trounced the high-tech world of electronic gaming (Take-Two Interactive).

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. On the other hand, the Boring Cash Generators were priced as if they were already on the scrap heap.

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 merely staying alive.

Digging for the next discounts
Of course, the past is past. The cash generators that were 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 that could have found them while they were down -- like the one 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 that 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 moneymaking machines Inside Value subscribers are snapping up today?Click hereto be our guest for 30 days.Subscribetoday and we'll also send you The Intelligent Investor,the book by Benjamin Graham that launched the value revolution, absolutely free.

This article was originally published on May 11, 2006. It has been updated.

At the time of publication, Fool contributor and Inside Value team memberChuck Salettaowned shares of Mattel, an Inside Value selection. The Fool has adisclosure policy.