Value Stock Investing: CarMax, Overstock.com

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It's a fallacy embraced by many investors: To generate huge gain, you have to absorb huge risk. To a value investor, it's just so much nonsense. Risk and reward do not march in lock step. Value-centric investors know it's possible to generate huge returns with low risk.

The value-centric investor "insures" against risk by buying shares at a discount -- by paying a price for stock that is materially lower than value. My risk is low if I buy shares of a company at 50 cents per dollar of value. My potential reward is a 100% gain. What if I can buy the same shares at 33 cents per dollar of value? All things being equal, buying shares at 33 cents per dollar of value involves lower risk because the gap between price and value is larger. And the potential reward of buying at 33 cents per dollar of value is much larger -- a 200% potential gain.

How do you find stocks that are selling at 50 cents or even 33 cents per dollar of value? The answer is easy to state, but difficult to put into practice: You have to be able to see things that other investors do not see. The world is full of investors that will tell you what you already know. Scores of investors are willing and able to tell you everything you need to know about wonderful companies like Google (GOOG Quote) and Amazon (AMZN Quote). ...