NEW YORK (MONEY Magazine) - Every decent high school coach labors -- often in vain -- to teach his players something called "fundamentals."

In basketball, that means you've got to work on defense and passing before you perfect your glorious three-pointer.

Fundamentals are every bit as important in investing. Unfortunately, most of us are just chucking balls from the three-point line.

You can do better. Two early masters of the game, value investor Benjamin Graham and growth maven Philip Fisher, wrote down their playbooks decades ago for anyone to see.

Graham looked for companies trading at great prices, and his skeptical, by-the-numbers approach is still a perfect model for anyone who wants to avoid getting smacked by a stock that doesn't live up to expectations.

Fisher, on the other hand, was all about expectations. He wanted to find the next great company at a good price -- he was one of the first investors in a little business called Texas Instruments -- and his story can teach you how to take a risk without just taking a flier.

We'll boil down the essentials of both men's thinking and show you how to apply their insights to today's market. We'll also point you toward stocks that we think might pass their ultrarigorous tests.

Graham had a remarkable record as a stock picker. From 1936 to 1956, his mutual fund racked up a compounded average return of at least 14.7 percent a year vs. 12 percent for the overall market. (If that doesn't sound like a big difference, consider that an initial investment of $10,000 in Graham's fund would have earned roughly $60,000 more than the average.)

But he developed his key investing principles only after surviving some memorable disasters. One of Graham's early picks, in 1919, was a company called Savold Tire. He bought the stock in April on its first day of trading and made 250 percent on the initial public offering; by October the company was exposed as a fraud and its shares were soon worthless.

In order to avoid similar mistakes, Graham tried tirelessly researching every company in which he placed his own or his clients' money. That wasn't enough either. The crash of '29 hit, and over three years Graham's portfolio lost some 70 percent of its value.

Graham knew that there had to be a better way. His two major books, "Security Analysis" (written with David Dodd) and "The Intelligent Investor," lay out a strategy built around three major points.

Get a margin of safety

Investors, Graham decided, spend too much time trying to imagine a company's future. Graham reasoned that no matter how carefully you research your investments, it is impossible to eliminate the risk that a company will prove to be worth less than you thought.

So investors ought to search for stocks with a "margin of safety" -- a price so low that you can make money even if some part of your analysis turns out to be wrong. In fact, he found, if you buy cheap enough, a lot of research may be redundant.

"Graham wouldn't do much investigation into the companies he invested in," says John Spears, a managing director of Tweedy Browne, which was Graham's broker for years.

You can look it up

Okay, so cheap is good. But what does cheap mean, exactly? Graham had something very specific in mind: In the classic version of his approach, you'd buy a stock when it trades for less than what it would be worth if the company were liquidated today.

For example, if a company has assets like cash and inventories worth about $10 a share and no debt, you'd have a nice margin of safety if you bought it at $6.

Of course, you'll never bag a Microsoft with a strict rule like this. In fact, a true Graham follower has to be resigned to buying companies that the rest of the market thinks are lousy.

"We buy blemished fruit," says Kahn Brothers president Thomas Kahn, a money manager whose father, Irving, worked with Graham.

Graham's approach has another virtue besides safety: There's little guesswork, because all the numbers you need are in the company's balance sheet. You can easily run a screen, using investment software or even free Web sites, to come up with a short list of stocks that could be cheap in Graham terms.

For example, if you screen for large and mid-size companies trading for significantly less than their book value, you can get a manageable list of about 30 stocks to investigate. (Book value is simply the value of a company's assets minus its debts.) But while that number is a start, Graham would have demanded that you dig a little deeper into the company's balance sheet.

Which brings us to our third point.

Throw out the trash

Not everything that a company says is an asset is really worth counting, Graham said.

Cash, often the first item listed on the balance sheet, is probably the only asset that's worth exactly what the company says. Accounts receivable and inventories may be worth less than printed numbers, but they're in the right ballpark.

Near the bottom of the list on a corporate balance sheet you'll find something called goodwill, which can include a lot of soft stuff like brand value. That's a paper asset worth nothing to Graham. So if you are looking at a company with a low price-to-book ratio and you find that most of its assets are goodwill, move on.

Clearly we're doing a lot more than "buying on the dips" here. Even poor old AT&T, down more than 45 percent since the beginning of 2003, would have to drop at least another 25 percent to get anywhere near Graham territory, since its market capitalization of $12 billion is still higher than its $9 billion in tangible assets. (Market capitalization is the stock price times the number of shares outstanding.)

So what would Graham like? We screened for stocks with market values of $500 million or more and prices 20 percent below their book value. (Graham favored stocks trading for just two-thirds of their true liquidation value, not book value, but such companies are thin on the ground in 2004.)

Of the 34 stocks that met this test, three seem especially attractive now.

Funds that follow in their footsteps You don't have to do it all yourself. We've picked out two funds that have taken Graham's lessons to heart, and two for Fisher fans.     Weitz Value Manager  Wally Weitz stresses Graham ideals, like having a margin of safety and ignoring emotional reactions to market moves. The fund has beaten the S&P 500 by an annualized five percentage points over the past decade.  Tweedy Browne American Value  The firm was Graham's broker. The managers buy only stocks that trade at less than liquidation value, and (like Graham) they rarely visit companies.  Mairs & Power Growth  Like Fisher, manager Bill Frels buys and holds -- the fund has one of the lowest turnover rates around. The fund invests largely in its home state of Minnesota, so Frels really knows the companies.  Growth Fund of America  Not everything this huge fund buys is Fisherlike. (It owns some cyclicals.) But it has low turnover and is backed by one of the best research teams in the fund business.

Dynegy (DYN: Research, Estimates) It's not hard to see why this stock is cheap. Houston-based Dynegy, which produces electricity in the Midwest and Southern California and owns natural gas pipelines, had an aggressive energy-trading operation and got caught up in an accounting scandal. One former exec was recently sentenced to prison.

But after closing its trading operations and jettisoning its top executives, Dynegy has begun turning a profit. The company owes about $11 billion, but it has $13 billion in assets. That net value of $2 billion compares with a market cap of just $1.5 billion, based on shares trading at $4.

UnumProvident (UNM: Research, Estimates) The nation's largest disability insurer has been stung by a flurry of lawsuits accusing it of unfairly denying claims. Worse, the complaints have triggered a multistate investigation into its practices.

But changes are in the works: Chief executive Tom Watjen, who took over in March 2003, has changed the claims process for policyholders, and the company has boosted the reserves it keeps to cover policy claims. Even if the company had to pay out all of those reserves and all its other liabilities, it would still have $6.2 billion in assets left, more than its market value of $4.8 billion.

Toys R Us (TOY: Research, Estimates) The nation's largest toy store is also an enormous landowner, and that's why Graham would be interested. Toys R Us owns 314 of its 685 stores -- and not just the buildings but the land they sit on.

What Wall Street has focused on is its lousy performance: More and more people are buying their toys at Wal-Mart rather than making a special trip to Toys R Us. But at just $16 a share, the company has a market cap of $3.5 billion, just below the value of its tangible assets, including all that real estate.

Phil Fisher is a lot less well known these days than Graham, which is ironic because the stock-picking approach Fisher described in his 1958 bestseller, "Common Stocks and Uncommon Profits," is actually closer to what most of us try to do -- except that Fisher did it a lot better.

Fisher was the prototype for growth investors: Whereas Graham cared about a company's value today, Fisher bought a stock based on his expectations about how the business behind it would grow in the future.

He invested in some of the fastest-growing corporations of his age. Fisher first bought Motorola, for example, in 1955, and held it until his death at the age of 96 this past March -- a holding period that would have turned a small investment into millions.

To find such companies, he did intensive research into the basics of the business, collecting "scuttlebutt" from competitors, customers and employees.

"Fisher may have been the first to recognize that companies are living and breathing organisms, not just pieces of paper," says Stanford Graduate School of Business professor Jack McDonald.

Even Warren Buffett, the latter-day investing legend who arguably did more than anyone else to popularize Graham, admired Fisher.

The Berkshire Hathaway chairman recently wrote, "It's been over 40 years since I integrated Phil's thinking into my investment philosophy. As a consequence, Berkshire Hathaway shareholders are far wealthier than they otherwise would have been."

The only difficulty with following Fisher is that his strategy can't be reduced to simple quantitative rules like "buy when margins are growing x percent and the price is less than y."

The secret to Fisher's success was discipline -- emotional self-control and a dogged attention to detail when making buy and sell decisions. Here are four key lessons from Fisher's writings and career.

Go to growth industries

Fisher wanted to buy companies that could keep increasing their profits for years and years. In a competitive world, the best way for a business to do that is to have a product that's genuinely new and tough for competitors to knock off.

Fisher invested in DuPont, for example, when the blasting-powder maker was developing cutting-edge products like nylon, cellophane and Lucite. And Motorola, which was just one of a slew of radio manufacturers in the mid-1950s, piqued Fisher's interest when it started moving into two-way communications for truckers, taxis and police.

So where would you find such transformative businesses today? You can safely ignore mature industries like auto manufacturing or fad-prone businesses like retailing or food service. (Fisher would never have fallen for Krispy Kreme.) More promising places to look now would be health care or technology.

Stay out of the heat

Like most technology-focused investors today, Fisher didn't mind owning companies that traded at a high price relative to their earnings. Still, he made it a rule to shun the hot stocks everyone was talking about.

He was also suspicious of initial public offerings. After all, if the business is so wonderful, why is it suddenly for sale? So forget about Google for now.

Research isn't something a broker sells

It's something you do. Many growth investors buy a stock because it seems reasonably priced based on, say, the five-year growth projections printed in Wall Street research reports.

The trouble is, analysts get those numbers wrong all the time. If those projections are the main reason you bought a company, you'll be tempted to bail out at the slightest disappointment -- which very possibly will be exactly the wrong time. (More on this in a moment.)

Fisher wanted to get a 360-degree view of any business he owned. He did this using tools once available only to professionals: company visits, industry contacts, visits to trade shows, and so forth.

But in the age of the Internet, there's enough information out there to allow you to get detailed answers to questions like these: Who are the company's customers, and why do they need this product? What is the company doing that its competitors are not? What else can the company sell when its main product is no longer in demand?

Because Fisher understood that buying a stock means buying a business, he also asked some questions even the most plugged-in analysts have a bad habit of ignoring.

"My father put a great emphasis on people," notes Fisher's son Kenneth, CEO of Fisher Investments. So Phil Fisher always needed to be satisfied that a company was run by people of "unquestionable integrity." (A red flag: managers who hand themselves loads of stock options.) He also wanted to see signs that management cultivated a healthy relationship with its employees.

Buy and hold...and hold...and hold

Fisher rarely sold a stock once he picked it. Early in his career, he invested in two stocks in the same industry. One he traded in and out of to try to take advantage of price swings; the other he tucked away. Years later, he observed that his gains from the stock he simply held vastly exceeded those from the one he traded.

The fact is, as simple as the nostrum "buy low, sell high" sounds, it's nearly impossible for most of us to outsmart the market in the short run.

An even worse idea, in Fisher's view, would be to sell a stock just because everyone else is bailing. Companies often report disappointing profit numbers when they are investing in plants or new business lines. If you've done your research, you'll come to recognize when those declines are actually an opportunity to buy more shares.

Fisher was so selective that he never held more than about 30 stocks at any one time. In that spirit, we set out to identify just one stock that Fisher might consider today.

Let's be frank -- Fisher would be horrified at the thought of anybody buying a stock only on a magazine's say-so. But we certainly think he'd find it worthwhile to start collecting some scuttlebutt on Xilinx (XLNX: Research, Estimates). Its stock currently sits at $27, down from $45 earlier this year, so there's no question of its being too hot.

The company has 50 percent of the market for semiconductors known as programmable logic devices (PLDs), which go into everything from routers to laptops to mobile phones. The profits on this product are impressive -- Xilinx's gross margin hovers around 60 percent -- and there's plenty of growth ahead.

Right now, PLDs are a $3.5 billion industry, and the chips are slowly but surely replacing another product called fixed logic devices, which have worldwide sales of $12 billion.

People-minded Fisher would also have liked the fact that Xilinx survived the recent tech downturn by cutting salaries across the board -- the CEO took a 27 percent hit -- instead of resorting to mass layoffs.

Graham and Fisher never had it so good. Here's how to find the info you need for free on the Web.

Hunting for Graham's "Margin of Error." To identify stocks that are trading for less than their underlying value, start by screening for those with a low price/book ratio. (Book value is assets minus debts.)

Just go to finance.yahoo.com and then click on the Screener, about halfway down the left-hand side of the page -- it's under the Stock Research heading. (The screener uses plug-in software that doesn't work on Macs.) The price/book screen is listed under the Balance Sheet criteria.

A price/book of less than 1 means a stock is cheaper than its net assets. A score of 0.75, for example, means the company is trading at a 25 percent discount to book.

Dig deeper Graham wouldn't have stopped at price/book; some common calculations of book value include funky stuff like goodwill. You've got to look at the balance sheet line by line -- and the easiest way to do that is here at CNN/Money. Type in a company ticker and click Go. On the next page, select Balance Sheet under Financials to the right on the blue bar up top.

You'll see the most liquid assets at the very top of the balance sheet. And at the bottom is net tangible assets, which subtracts liabilities as well as goodwill and other stuff you're better off not counting on.

Fisher's first stop There was no end to what Philip Fisher wanted to know about a company, but there's one place every growth investor should start: the stock's 10-K annual reports for the past several years.

The Securities and Exchange Commission's EDGAR archive of filings is at www.sec.gov, but secinfo.com is easier to use. (It's free for 40 log-ins.)

The first part to read is the management's discussion and analysis (MD&A) section. Fisher would point you to the company's evaluation of its growth potential and how its products fit into its marketplace, as well as its appraisal of its rivals. If their story doesn't ring true to you, move on.

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