Warren Buffett once said that "the most important quality for an investor is temperament, not intellect."

That's a great way to think about investing. Exhibiting patience, calm, and objectivity in the face of a sometimes-overwhelming mountain of conflicting short-term news is incredibly difficult. Waiting for the right opportunity, when the odds are in your favor, is even harder.

Buffett has made a career out of it. The rest of us have mixed results. But my daughter recently reinforced this valuable investing lesson.

A short story
She loves stuffed animals and lights up at the sight of the squirt-gun-racing game at amusement parks -- because she can win more of them.

When she first tried the game, though, she rarely won. So she asked me, "How can I win more stuffed animals?"

"Who usually wins the game?" I asked.

"Teenagers and adults, because they're older." She thought for a moment. "Maybe I should play against kids and try to hit the target first." When I asked her what she'd do if teenagers or adults were playing, she gave the perfect answer: Don't play.

Nowadays my daughter waits until the odds are in her favor to play the squirt-gun game. If they're not, she walks away, money in hand.

As investors, we should do the same. If the stock market isn't offering good opportunities today, no matter how much we want our own stuffed animal, we should keep our money in the bank and try again later. Such wisdom from a child.

Competitive advantage
Of course, you need more than temperament to generate huge long-term returns. You need to find those good opportunities -- and one place to start is competitive advantage.

According to Capital IQ data, there are nearly 7,000 companies trading on the major U.S. exchanges. Those companies sell everything from high-tech gadgets to no-tech commodities. Competitive advantage is one way to separate the great companies from the rest of the herd. As Buffett notes:

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

Competitive advantages come in many forms. At Apple (NASDAQ:AAPL), it’s the combination of a strong brand name and a corporate culture of innovation. General Electric (NYSE:GE) is led by great managers who run strong businesses that generate high returns; GE also has access to low-cost capital. Research In Motion (NASDAQ:RIMM) created a disruptive technology, attracted lots of customers, and locked them in with the network effect.

Sustainable competitive advantages are one mark of a good company -- but they don't mean it's a great investment.

Great prices
As Buffett said, "Price is what you pay. Value is what you get."

Finding great companies is pretty straightforward. You could probably name a dozen great companies off the top of your head -- and I include Apple, GE, and Research In Motion.

The tough part is finding greatness on sale. That's why it's important to understand tools like discounted cash flow (DCF) and economic value added (EVA) -- they allow you to estimate a company's value so that you can invest at attractive prices.

First Solar (NASDAQ:FSLR) and Genentech (NYSE:DNA) are two companies that have changed and continue to change energy and medicine, respectively. Unfortunately, according to some of my own simple DCF estimates, their share prices come with very high expectations built in -- and are therefore less attractive at current prices.

Contrast that with Hansen Natural (NASDAQ:HANS). While it may not be changing the world, its energy drinks are beloved by customers -- but shares of the energy-drink maker have fizzled out recently. Apply the same basic valuation criteria to Hansen, and you'll find that the stock has lower expectations built into the stock price. Not surprisingly, it looks more attractive at its current prices.

Warren's investing recipe
To summarize, Buffett has a winning investing recipe:

  1. Find great companies.
  2. Buy them at great prices.
  3. Invest only when the odds are in your favor.

That's the winning combination. You may roll your eyes at how easy it is to comprehend, but I assure you that it's not easy to put into practice on a daily basis.

This is the recipe we use at Motley Fool Million Dollar Portfolio. For example, we've twice recommended Under Armour (NYSE:UA) at prices we believe undervalue the company. It's a growing concern with a solid competitive advantage in its market, and we're more than willing to hold this company for the next five to 10 years to give us the chance for multibagger returns.

Our goal at Million Dollar Portfolio is to use this strategy to turn $1 million into $1 billion in 50 years. If you want to learn more about MDP and how it can help you patiently invest in great companies at great prices, simply click here and tell us where to send the info.

David Meier is the associate advisor at Million Dollar Portfolio. He used to design gas turbines at GE and owns shares. The Motley Fool owns shares of Under Armour. Under Armour is a Rule Breakers and a Motley Fool Hidden Gems recommendation. Apple is a Stock Advisor selection. The Motley Fool takes its disclosure policy very seriously.