(FORTUNE Magazine) – It may be time to throw away your investing books, or at least tear out a few pages. The basic measure of investment risk, which has become an integral part of many stock-picking strategies, is being called into question by the very people who made it famous. Their new findings suggest that you can still beat the market, but doing so may require a new approach. Simply put, folks had long been led to believe that the more volatile their investments were, the more money they could expect to earn from them over time. The widely accepted measure of volatility that goes along with this belief is something called beta, which compares the price movement of a stock with that of the overall market. A stock that has a beta of 2, for instance, moves 2% in price for every 1% change in the market. A stock that has a beta of 0.5 is only half as volatile as the market. Under the old religion, a stock with a high beta should return more over time than a stock with a low beta. But now this comforting belief turns out to be no more than a fairy tale. What's more, the big bad wolf turns out to be one of the folks who helped put beta and all its attendant beliefs in the canon of modern finance in the first place -- Eugene Fama, a professor of finance at the University of Chicago. Says Fama of his, well, inFamas findings: ''We always knew that the world was more complicated.'' Beta has long been under attack by other academics, but this turn by one of its most prominent standard bearers promises to finally bring it down. In a paper that has been circulating recently in preliminary form and will be formally published this summer, Fama and an associate, Kenneth R. French, also at Chicago, studied the performance of more than 2,000 stocks from 1941 to 1990. Says French of their findings: ''What we are saying is that over the last 50 years, knowing the volatility of an equity doesn't tell you much about the stock's return.'' Beta, say the boys from Chicago, is bogus. Fortunately for investors, the same Fama-French study found other characteristics that did help identify stock market winners. Among the variables that they looked at, the ratio of stock price to book value was consistently the most powerful for explaining the differences in average stock returns. Based on that finding, investors should focus on stocks with low price-to-book multiples. Fama and French also found that low stock-market capitalization proved a valuable indicator of high future returns. Beyond shaking the investment world, the demise of beta is bringing sweeping change to the executive suite. The capital asset pricing model, a financial cousin of beta, has long been used by managers to determine the attractiveness of new ventures. This investing tool has been a monkey wrench for business, says Donald Mitchell of Mitchell & Co., a management consulting firm in Weston, Massachusetts. Because the accepted wisdom holds that companies with high betas must pay investors commensurately high returns, chief financial officers of high-beta companies can be loath to invest in a new plant, for instance, unless they feel they can earn that extra dollop of return. As a result, many companies turn down investments they should make. Says Mitchell: ''Dethroning the model may be the best thing to ever happen to American business.'' GIVEN THE RIGOROUS testing processes in the groves of academe, nailing down the new guides for stock picking and executive decision-making could take years. But Wall Streeters, whose standards are more practical if less exacting, have already produced pretty convincing data to support the Fama- French suspicions about what works. The chart at left, using data compiled by Goldman Sachs, shows average annual total returns for three stock-picking strategies over the past 25 years. The performance numbers are for stocks in Standard & Poor's 500-stock index, a far smaller universe than would be required for a university study. But the results from the real world make up in investor usefulness all that they lack in academic purity. Not only do small and low price-to-book stocks beat the S&P 500, but so do stocks with low P/Es. Why don't low P/E stocks make it onto Fama's list of recommended strategies? Because, says Fama, the reason low P/E stocks do well is that many of them are also low price-to-book stocks. Some might call that academic hairsplitting. Happily, investors who wish to play on these apparent anomalies in the market have plenty of mutual funds to choose from. Pennsylvania Mutual (800-221-4268), for example, is a no-load fund with a heavy weighting of stocks selling at low price-to-book multiples. The average multiple for shares in the fund's portfolio is around 2, vs. 3.8 for the S&P 500. The Guardian Park Avenue fund (800-221-3253), with a 4.5% load, focuses on stocks with low P/Es; the average P/E multiple of its stocks is 14, vs. 26 for the market. Finally, for those seeking small stocks, there's the top-performing WPG Tudor fund (800-223-3332).

CHART: NOT AVAILABLE CREDIT: FORTUNE TABLE/SOURCE: GOLDMAN SACHS CAPTION: SWEET SPOTS IN THE MARKET Beta may be dead, but these three strategies still produce superior results.