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 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.


Price (1/19/2006)

Price (1/19/2007)

Dividends Earned












Beazer Homes (NYSE:BZH)





Whole Foods Market (NASDAQ:WFMI)





Sunoco (NYSE:SUN)





Akami Technologies (NASDAQ:AKAM)





Continental Airlines (NYSE:CAL)





Total Return


On average, this portfolio returned a shade above 11%. That's not too far from the oft-quoted long-run stock market return rate. Note, though, that the closest any individual stock in this group came to that average return was gasoline giant Sunoco, 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, fellow Fool Tim Beyers expressed serious concern about Whole Foods' valuation back in March of last year -- before its fall from grace. As much as he had very good reason to love the company, he couldn't bring himself to like its then overpriced stock. Similarly, who didn't hear the warning messages about the housing bubble? Beazer's stock was clearly in the path of that storm.

On the flip side, oil is an exceptionally cyclical commodity. It always has been, and it probably always will be. With oil hitting unprecedented highs last year, it simply made sense to go looking in the direction of firms that would benefit once oil started retreating. With so much of their costs tethered to the price of jet fuel, airlines were a natural place to look. Sure enough, along with other airlines, Continental has rebounded substantially as oil has fallen.

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.

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 member Chuck Saletta did not own shares of any company mentioned in this article. CNET and Akamai are Rule Breakers picks. Whole Foods is a Stock Advisor selection. The Fool has a disclosure policy.