The Wealth Secret

Amongst the daily ebbs and flows of market chatter, there's one secret that seemingly everyone overlooks. Even many experienced investors haven't figured it out. And not knowing it keeps many people from stock market investing success.

The secret is this: It's unusual for someone to get rich by buying one stock that goes to the moon. In any decade, only a handful of stocks achieve gains of 5,000%. Even if you happen to pick that one great stock out of the thousands, you likely won't invest enough money to become rich overnight. A $10,000 investment in a stock that gains 5,000% is nice, but it won't turn you into a millionaire.

Now, I'm not saying the stock market won't make you rich, because it can. But the way to do it isn't by gambling on high-risk stocks. Instead, turn the market into a money-printing machine by buying the stocks that have the highest expected returns.

And what stocks are those?

Value stocks.

A value portfolio
Consider the following stocks, all current or former recommendations from our Inside Value newsletter service:

Each of these stocks was selected because it met three specific criteria:

1. It was dirt cheap.
2. It was printing cash.
3. It had a solid market position.

Focusing on these three attributes really puts the odds in your favor, and the payoff can come in many different ways.

The first way is through an acquisition. If you can see the value in a company, often other people can, too. MCI shareholders got paid off within months when Verizon (NYSE:VZ) and Qwest (NYSE:Q) got into a bidding war to buy the telecom. Masonite, too, was acquired quickly by KKR.

The second way to get paid off is by having the stock simply return to its intrinsic value. For instance, if you buy a stock for 40% off and it returns to its fair value, you make a quick 67% return. This was the case for Dollar Tree and Mattel.

The third way to profit is to have the company grow at the same time that the shares return to fair value. This is the ideal scenario, and it's what led to the outsized gains in Intuit and CarMax, for example.

The fine print
While the examples above do a great job of illustrating different ways a value strategy makes money, don't use the table to judge our performance. Obviously, the table doesn't contain our biggest losers. (For that matter, it also doesn't contain our biggest winners.) Instead, look at the numbers. Our picks have beaten the market by an average of 6 percentage points since the service's inception.

The other misleading thing is the number of sales. Generally, value investors prefer to hold for a long time to reduce expenses and fully realize a stock's potential. (Our Inside Value portfolio tends to follow that strategy, too.)

The sales you see happened for two reasons. Either we were forced to sell when the company was acquired, or we identified other stocks that, frankly, offered a bigger upside.

Fool's final word
When you buy undervalued companies, the odds are truly stacked in your favor. It's the closest thing to a free lunch that the stock market offers.

If you're interested in learning more about value stocks -- including our analysis of the stocks we see as the best values in the market today -- you can get a free trial to Inside Value for 30 days.

Fool contributor Richard Gibbons likes to perform trivial arithmetic operations in his head. He does not have a position in any of the stocks discussed in this article. CarMax is a current Motley Fool Inside Value recommendation. The Fool has a disclosure policy.