In the cubbyholes of academe, where the behavior of stock prices is analyzed with Greek letters and fearsome equations, it’s gospel that you can’t beat the market—at least not for long and by much. But some gifted money managers have proved that you can. Over periods of at least five years, they have dramatically outperformed Standard & Poor’s 500-stock index, the measuring stick used by academics and investment pros alike. Amateur investors can glean valuable insights from a close look at three of these overachievers: Ralph P. Coleman Jr., president of Over-the-Counter Securities Fund; David H. Baker Jr., president of 44 Wall Street Fund; and Barry Ziskin, editor of an advisory service called the Opportunity Prospector.

Their strategies, though widely divergent, have important elements in common. All three men are stock market fundamentalists—that is, their overriding concern is with value, not with trying to anticipate general price swings. They sell a stock only when they think it no longer offers as much profit potential as others that they’ve spotted. Another link among them is that they shun large, well- known companies that are favorites of bank trust departments and other big financial institutions. The reason: such companies have been so efficiently analyzed that the chances of finding comparatively undervalued issues among them are usually slim or nonexistent.

Coleman, Baker and Ziskin concentrate their stock picking in the “inefficient” sector of the market, a universe of several thousand companies that aren’t acceptable to major institutions. That’s usually because the companies aren’t large enough, but sometimes because they’re in an industry that’s out of favor—a pickle that even an S&P 500 company can find itself in. Few brokerage house analysts follow such companies, and information about them is often hard to come by. Consequently, it’s within this universe that undervalued issues are most likely to be found.

Investing successfully in small or neglected companies calls for no end of prospecting and analytic drudgery. That doesn’t faze Coleman, Baker or Ziskin; they are workaholics, obsessed by the stock market. They are also patient investors. It sometimes takes several years for the merits they detect in a company to become widely recognized and fully reflected in the price of its stock.

Each man has a distinctive approach to investing. Coleman’s resembles that of a collector who haunts offbeat auction houses and flea markets, buying anything he thinks has real quality and is selling for a song. In this way he has accumulated about 350 stocks in his fund. “He has an incredible eye for picking things,” says a rival fund manager, Thomas Barry of Rowe Price New Horizons.

Baker is a risk taker. His philosophy: “The only way to avoid risk is to stay in bed in the morning, and even then the ceiling might fall in on you.” But the risks that Baker takes are carefully calculated.

Ziskin, the youngest and most systematic of the three, is in a sense a human computer. He has programmed himself to buy and sell stocks on the basis of exacting and undeviating criteria. This insulates him from an investor’s worst enemies: fear, greed and indecision.

THE COLLECTOR

Oshkosh B’Gosh is not an exclamation but a Wisconsin clothing maker. The company is fairly typical of the holdings of Ralph Coleman’s Over-the-Counter Securities Fund. More than half of its companies are too small to be listed on NASDAQ, the price quotation system for stocks sold over the counter.

Thinking small has paid off big for Coleman’s fund. Its net asset value per share, with dividends reinvested, rose 54% last year vs. 19% for the S&P; over the five years from 1974 through 1979 it climbed 318% vs. the S&P’s 99%. Moreover, the fund has proved its ability to weather the ferocious bear markets of the past two decades. A $10,000 investment when the fund was started in 1956 would have been worth $238,000 at the end of 1979 (assuming reinvestment of dividends and capital gains). Over the same period, a $10,000 investment in the S&P 500 would have grown to about $80,000.

Coleman, 56, says an addiction to investing runs in his family. Both his father, an illustrator, and his grandfather were keen investors. After getting an M.B.A. from the University of Pennsylvania’s Wharton School, Coleman went into financial journalism, which led him into fund management.

In 1951 he started OTC Review, a publication devoted to the over-the-counter market. Then, having scraped together $110,000, he launched Over-the-Counter Securities, which recently had assets of nearly $32 million. The fund sells shares through brokers, with a maximum sales charge of 8%.

Coleman gets his leads to promising offbeat companies mainly from the avalanche of information that flows in to his publishing firm — annual reports, product catalogues, press releases and reports by analysts who specialize in OTC stocks. He sifts this material like a prospector panning for gold. But he seldom visits companies; for him, the realities are in balance sheets and income statements. He prefers companies with little or no long-term debt, a strong cash position and high profitability — ideally, at least an 18% return on shareholders’ invested capital. For the most part, he invests in stocks whose price/earnings ratios (their price divided by current earnings per share) are lower than average.

Most strategists start out by deciding which industries have the most favorable prospects, but not Coleman. Instead he focuses on individual companies. His reason: “There are many excellent companies in prosaic industries — textiles and apparel, for example — but most people are too lazy to study them.” By scrutinizing small, obscure companies with his collector’s eye for quality and businessman’s attention to the nitty-gritty, Coleman has wound up owning stocks in a slew of companies that have become takeover targets. Business Week recently described Over-the-Counter Securities as “the closest thing to a takeover fund available.” Its biggest winner, Belridge Oil, was unknown even to oil analysts when Coleman started buying the stock at $110 a share in 1974. His eventual investment of $422,500 netted his fund nearly $5.6 million when Shell Oil acquired Belridge recently.

Typically, one in five of Coleman’s stock selections proves to be a dud. But he’s able to take losses in his stride because his fund is so widely diversified. Diversification is crucial for anyone investing in offbeat OTC companies, Coleman insists. He advises individuals to buy at least half a dozen issues, preferably more. Do-it-yourself investors can get help from Coleman’s OTC Review (Box 110, Jenkintown, Pa. 19046, $30 a year), a monthly devoted to broad coverage of the over-the-counter market, or from his other monthly, Over-the-Counter Special Reports ($65 a year), which analyzes three companies per issue.

Six companies among Coleman’s favorites last month: Alabama By-Products (recently traded at $70), a coal and coke producer; Detrex Chemical Industries ($31) and Quaker Chemical ($24), producers of specialty chemicals; Genesee Brewing ($17); Standard Register ($29), which produces forms for business and computers; and Haemonetics ($18), a manufacturer of blood-processing systems and other medical products.

THE RISK TAKER

The 44 Wall Street Fund, founded by David H. Baker in 1969, is not for the fainthearted. It soars when the market rises, but in down markets it plummets. In the super-bear market of 1973 and 1974, the value of a share dropped 75%, and in last October’s market slide it fell 18%. In spite of periodic reverses, Baker’s fund has one of the best records in its industry. It outperformed the S&P 500 by five to one in the 1970s and by nearly four to one last year, according to Lipper Analytical Services, a tracker of mutual fund performances. From 1975 through 1979 net asset value per share, with dividends and capital gains reinvested, rose a phenomenal 1,019%.

Because Baker concentrates his investments in only 20 to 25 stocks, most of them highly volatile, significant price changes in just a few of his larger holdings have a big impact. Like an individual who tries to beef up his profit potential by buying stocks on margin with money borrowed from his broker, Baker does a part of his investing with cash borrowed from banks. This use of leverage adds to the fund’s volatility.

Surprisingly, the background that Baker brings to management of a swinging fund is impeccably conventional. The son of a West Point-trained Air Force general, he graduated with first honors from the University of Maryland, served three years in the Navy and, after getting a Harvard M.B.A., climbed the Wall Street ladder swiftly in such blue-chip firms as Lehman Brothers and Goldman Sachs. He founded 44 Wall Street Fund 11 years ago at the age of 35.

Baker’s management act is a solo performance. He shuttles periodically between Manhattan and a house on Grand Cayman in the British West Indies, where brokers keep him well posted with daily calls that start before the market opens. Distance from Wall Street, Baker claims, saves him from getting bogged down in trivia. His strategy is based on a “sector approach.” He first determines which industries offer the highest growth potential and which are their most promising sectors — for instance, the exploration sector of the energy industry. Then he looks for highly profitable companies with leading positions in those sectors. Finally, he picks stocks that appear to be most undervalued in relation to comparable issues.

The investment sectors that Baker has favored for some time were among the top market performers in 1979 — oil and gas exploration, medical care and technology. They are still his favorites, though he has cut back somewhat on technology companies that could be affected by a recession. The stock he recommends most strongly — a speculative issue suitable only for aggressive investors — is American Quasar Petroleum (OTC, $35), which explores for oil and gas in the Southwest and Canada. In the medical field, he likes National Medical Care (New York Stock Exchange, $27), a manager of kidney dialysis centers, and Lifemark Corp. (NYSE, $25), which operates hospitals. He is bullish on Management Assistance (NYSE, $16.50), a company that sells small business computers. Although it has had problems, he considers its stock cheap on the basis of estimated 1980 earnings of $2.40 per share. And though American International Group (OTC, $58) is a well-recognized insurance company, he thinks it still has plenty of profit potential. Its worldwide operations in property and casualty insurance have a high rate of growth.

The 44 Wall Street Fund requires an initial investment of $1,000 and sells its shares by mail or wire at no sales charge. A prospectus can be obtained by writing to 44 Wall Street Fund, 150 Broadway, New York, N.Y. 10038 or by telephoning 212-374-1146.

THE HUMAN COMPUTER

Barry Ziskin made his first investment at the age of 12. A whiz at math, he decided in his teens that the stock market was the most exciting place to apply this talent, and he spent more time studying stock analysis than schoolbooks. After a brief stint at Arizona State, he went to work at 20 in a small brokerage house. He was then developing the system he is now using, and he undertook the enormous chore of checking how well it would have worked all the way back to 1966. The results convinced him it was a winner.

Five years ago, when he was 23, Ziskin went into business on his own as a registered investment adviser. He now manages about $20 million of other people’s money. The fees he charges investors are high — about 3% annually on portfolios of $200,000 or less.

Four times a year, Ziskin screens about 8,000 stocks to find those that meet his seven rigorous and inflexible investment criteria. He doesn’t use a computer because, he says, no computer can be programmed to interpret corporate financial statements. For a company to pass muster, it must have a growth record that is strong and consistent: its pretax income from operations must show growth that works out to a compound annual rate of at least 20% for six straight years — including the current one, using his estimate — and not less than 10% in any one of those years. The company must also be in tip-top shape financially and must use conservative accounting.

Ziskin’s other requirements: institutions must own less than 10% of the shares outstanding, and the stock’s price must be less than 10 times his estimate of earnings per share for the current year. Ziskin checks with each company and its competitors about its problems and prospects.

The number of stocks that qualify in each quarterly screening seems to be a good indicator of whether stock valuations in general are on the high or low side. The largest number of qualifiers — 44 — showed up at the bottom of the bear market in 1974. The smallest number — one — appeared in the retroactive test run: the time was June 1969, when stock prices were not much below their historic peaks. In the most recent screening last December, there were 34 qualifiers.

The Ziskin performance index

A stock that qualifies is automatically recommended as a “buy.” A stock is disqualified when it ceases to meet any one of Ziskin’s criteria; in most cases, that’s because the stock price has risen to more than 10 times estimated earnings per share. For the performance index that Ziskin keeps, a stock is considered sold at the price at which it flunks a screening. His index was up about 400% in the four years from 1976 through 1979. That’s a hypothetical gain that doesn’t take into account buying and selling commissions, and it’s based on certain assumptions that in practice couldn’t be followed to the letter. Nonetheless, Ziskin’s system has achieved outstanding results. Out of the 112 issues recommended and subsequently disqualified from June 1973 to December 1979, two were losers, two broke even and 108 showed gains averaging 78%.

Among stocks that passed the December screening, Ziskin’s top choices were Pep Com Industries (American Stock Exchange, $15), a North Carolina Pepsi-Cola bottler; Hickory Farms (OTC, $8), a nationwide chain of cheese stores; and Preway (OTC, $22), which makes energy-saving fireplaces. Other recent favorites of Ziskin’s were Fab Industries (ASE, $ 13.50), the textile company that developed the highly successful SuperSuede; Kimball International (OTC, $16.50), a manufacturer of pianos and office furniture; and Varlen (OTC, $16), a maker of railroad equipment.

Ziskin’s stock selection service, the Opportunity Prospector, costs $480 a year for 24 issues but is sent free to active clients of Laidlaw Adams & Peck, the brokerage house that distributes it. Money readers can get a free sample copy by writing to TOP, Laidlaw Adams & Peck, 20 Broad St., New York, N.Y, 10005.

It would be surprising if Coleman, Baker and Ziskin all stayed as far ahead of the pack in the 1980s as they have in recent years. But any one of them could. There’s a Wall Street dictum: “The race is not necessarily to the swift, but that’s the way to bet it.”