In his famous 1984 speech "The Superinvestors of Graham and Doddsville," Warren Buffett laid out the key factors that enabled him and others like him to trounce the market over the course of decades. Even though he very publicly shared the secrets of his success, Buffett and his ilk remain market-walloping investors to this day. That flies in the face of the theory that once information about investing becomes public, it gets priced into the market, and no longer provides anyone an advantage.

More importantly for you, it also suggests that Buffett's and the other superinvestors' strategy has tremendous staying power. So even today, if you follow in their footsteps, you have a chance of becoming the next superinvestor. Yet even if you're not destined for international financial fame, the principles they espouse will still serve you extremely well as you invest your own cash.

How do they do it?
As Buffett pointed out in that speech, the overarching theme that ties the superinvestors together is their relentless focus on two simple factors: price and value. They all aim to buy whenever the market charges less for a stock than what the company behind that stock is truly worth.

When it comes right down to it, the secret to Buffett's and the other superinvestors' tremendous success is hardly a secret at all. They're simply the bargain hunters on Wall Street. As long as stock market activity is dominated by traders, with their short-term focus on and obsession with price movements, those value investors will have the opportunity to profit handsomely.

The tough part
If it were really just that easy to trounce the market by value investing, everyone would be doing it, and the superinvestors would lose their advantage. The reason value investors consistently maintain their edge over the market is that it's tough to go against popular sentiment. As a stock skyrockets upward, it's tempting to rush in to buy so you don't miss out. It's also easy to think that a stock that's dropping like a stone is on its way toward zero.

When it's your money on the line, sentiment like that is very tempting to follow. Ultimately, that's dangerous to your financial well-being. But in the heat of the moment, when it's your cash at risk, it's just way easier to follow the herd.

At the end of the day, you simply cannot do what everybody else is doing and wind up ahead of the market. Indeed, if you want to buy low and sell high, you have to be willing to go against popular sentiment -- to buy when everyone else is selling, and sell when everyone else is buying.

The way to be consistently successful
Of course, there are times when the herd is right. It was pretty clear that General Motors was driving toward oblivion years before its bankruptcy filing. That's why it's so important to pay attention to what the company behind the stock is really worth, not just where it's trading. To be successful at value investing, you need both elements to be favorable: the stock's price and the company's true value.

It's not always simple to get a handle on that true value. There are two easy questions I always ask, though, to see whether there may be some real value hiding just below the surface:

  • How well does the company generate cash from its operations? If those operations consistently throw off more real cash than the company claims as accounting earnings, it's generally a sign the company has a solid underlying business.
  • Does the company have cash lying around? If a company has more cash than debt, its "enterprise value" (market cap minus cash plus debt) will be below its market capitalization. In essence, a low enterprise value means an investor could buy all the company's stock, then turn around and use that cash to help reduce the out-of-pocket costs of acquiring the company. It also means that the business itself has more financial flexibility to pounce on opportunities it uncovers.

From an individual investor's perspective, the big advantage of a low enterprise value is that you can buy your stake in the business, and get its flexibility for a lower price than a quick glance at its P/E ratio would initially lead you to believe.


  • Both those questions can be answered favorably, and
  • You trust the company's management to deploy its cash stash prudently, and
  • The company's stock is trading at reasonable levels

...Then there just might be a real value there, waiting for you to buy. Take a look, for instance, at how these companies stack up:


Cash From Operations
(in Millions)

Net Income
(in Millions)

Enterprise Value
(in Millions)

Market Capitalization
(in Millions)

P/E Ratio

Enterprise Value to Earnings Ratio

Microsoft (NASDAQ:MSFT)














Stryker (NYSE:SYK)







Western Digital (NYSE:WDC)







Jacobs Engineering (NYSE:JEC)







Interactive Data Corp. (NYSE:IDC)














Data provided by Capital IQ, as of Aug. 19, 2009.

While these aren't official buy recommendations, they do illustrate part of the thought process that goes into picking recommendations for Motley Fool Inside Value. Inspired as we are by Buffett and the other superinvestors of Graham and Doddsville, we're using the same principles that made them rich to help us in our quest to beat the market.

While we haven't been successful with every pick, our overall results have outpaced the broader market's since our inception five years ago. Through boom markets and busts, the value principles espoused by the superinvestors still work today.

If you're ready to follow in the footsteps of those market-trouncing superinvestors, and claim your chance of becoming the next member of that elite group, join us at Inside Value today. If you'd like to see how we put the superinvestors' principles to work before becoming a member, that's fine, too. Simply click here to start your 30-day free trial.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Microsoft. Microsoft and Stryker are Inside Value selections. Interactive Data is a Motley Fool Stock Advisor pick. The Fool owns shares of Stryker and has a disclosure policy.