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 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 know what they're doing. The trailblazers of Wall Street include greats like Benjamin Graham, Warren Buffett, Walter Schloss, and Bill Miller. Fortunately, they've left us with a clear path to follow in building our own market-beating portfolios.

Beating an imperfect market
The strategy these investing greats have 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 better than my broken crystal ball. At its best, the market reflects the aggregate opinion of its participants. 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 eventually cancel out, 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 less than 11%. That's not too far from the often-quoted long-run stock market return rate. Note, though, that the closest any individual stock in this group came to that average return was banana titan Chiquita, which actually lost money for its investors. 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, some of us have been sounding the warning sirens about the lousy economics of the satellite radio business since last year. Given the clear financial distress in the industry, it was only a matter of time before Sirius' stock broke down.

On the flip side, oil prices have been above $50 a barrel for more a year. High oil prices always invite interest in alternative fuels. Add in Congress' idiotic decision last year to mandate ethanol as a fuel additive starting with the peak of this year's driving season, and a timely investment in a company like Pacific Ethanol should have been a straightforward move to make.

As an investor, you didn't have to buy all of 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, my wife currently owns Chiquita, but she bought after its fall from grace. The ugly combination of high gasoline prices and shifting European import rules had knocked its business model for a loop, taking the stock down with it. Now that the company has had a chance to start adjusting its operations to the new reality and the more recent E. Coli scare seems contained, its business should have a decent chance of recovering. She didn't happen to catch the absolute bottom of the stock, but she 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 who bought during the panic sale are doing far better.

Get started now
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, value still works to deliver market-beating returns.

If it has been some time since you cashed your first paycheck, today really is the best day to begin your successful investing program. Click here to be my guest at Inside Value free for 30 days.

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

At the time of publication, Fool contributor and Inside Value team memberChuck Salettahad no direct ownership stake in any of the companies mentioned in this article. The Fool has adisclosure policy.