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One Man's Secret to Crazy Wealth

By Tim Hanson - Updated Nov 11, 2016 at 4:51PM

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It takes courage to be contrary, but it sure pays off.

Among the best lessons you can learn from the investing success of the one and only Warren Buffett is this one: Read ... a lot.

Indeed, Buffett's business partner, Charlie Munger, told an audience last year that the best way to succeed in the stock market is to "sit down ... and read -- and do it all the time."

Buffett was all the evidence Munger needed to support this claim. "An observer," he noted, "would find that Warren spent most of his time sitting on his [rear end] and reading."

You never know what you'll find
I like this advice. It's easy to follow, generally enjoyable, and as an English major-turned-senior stock analyst, I get my language fix in what can easily turn into a numbers-based career. Recently, I found myself reading about nightclub-turned-casino "impresario" Sam Nazarian in The Wall Street Journal.

Nazarian's story is an interesting one. Though part of a wealthy family, the 32-year-old has already made his own fortune by buying up unwanted buildings in sketchier parts of Los Angeles and turning them into nighttime hotspots. Now, with his purchase of the over-the-hill Sahara hotel and casino, Nazarian looks to do the same in Las Vegas.

This is not an article about casino redevelopment
If you want to read more about Nazarian, WSJ has the scoop. I won't rehash the rest of the story here. Instead, I want to talk about an epiphany I had about 600 words into Tamara Audi's article: No one gets rich by doing what everyone else is doing.

Perhaps this is an obvious point
To an extent, this was also the central lesson of Michael Lewis' fabulous 2003 book Moneyball (another worthy read), about the success of the Oakland A's baseball franchise. One of the reasons the A's were able to compete in the major leagues on a comparatively shoestring budget is that they were willing to sign baseball players who -- in the eyes of scouts -- didn't "look" like baseball players.

That could mean they were a little overweight, or slow, or just plain goofy-looking. But the stats said these guys could play ball ... and the A's gave them the chance to prove it.

So it goes in investing
Similarly, the best investors are those who are willing to buy when others are selling, sell when others are buying, and buy and sell the companies that no one else is willing to look at. That means you need two core competencies:

  1. The temperament to ignore the market's mood swings.
  2. Research expertise in small- and micro-cap companies.

Given the recent volatility in the market, we've been writing about temperament a lot on Fool.com. And we hope you're reading. After all, when a group of business-school students asked Buffett why so few have been able to replicate his investing success, Buffett's reply was simple: "The reason gets down to temperament." That's why Buffett's been such a great investor.

But this article isn't about temperament, either
While temperament is crucial to successful investing, for the purposes of this article, we'll assume you already have it, or are at least working on it. The question is: Where should you put that temperament to work?

The answer gets back to my Nazarian epiphany. Go where no else is -- among small- and micro-cap stocks.

Here's why
We all know the market has been down since the beginning of the year. It's worth noting, though, that certain segments are providing more opportunities than others. According to my research, while there are just 299 large caps down more than 35% since the beginning of the year, more than 3,000 small caps are down 35% or more over the same time period.

When you take into account that small companies receive far less analyst coverage than their larger peers, and aren't on the front pages of newspapers or the subject of congressional hearings, it starts to look to me as though:

  1. Far more small caps than large caps have been unfairly sold off.
  2. Far more small caps than large caps have the potential for a fast recovery.
  3. Far more small caps than large caps present opportunities at which no other investor is looking.

In other words, investors with the right temperament absolutely must be fishing in these waters. Take a look:

Company

YTD Return

No. of Analysts Covering

Alcon (NYSE:ACL)

(41%)

14

Corning (NYSE:GLW)

(63%)

22

Sprint Nextel (NYSE:S)

(79%)

34

Perini (NYSE:PCR)

(49%)

4

Dillard's (NYSE:DDS)

(76%)

5

Mine Safety (NYSE:MSA)

(54%)

8

Data from Capital IQ (a division of Standard & Poor's) and Thomson Financial.

The takeaway
Although it can take some time to wade through all of the small-cap opportunities the market is currently throwing our way, that's exactly what we're dedicated to doing at our Motley Fool Hidden Gems investing service ... because few others are willing to do it. (If Sam Nazarian were a stock analyst, he probably would be.)

If you'd like to see what we're researching and recommending today, click here to join Hidden Gems free for 30 days. We're more excited about being small-cap investors today than at any other time in our service's history.

This article was first published on July 25, 2008. It has been updated.

Tim Hanson owns no shares of any company mentioned. Perini Building is a Motley Fool Hidden Gems Pay Dirt recommendation. Sprint is an Inside Value pick. The Fool's disclosure policy is nursing a wind burn.

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Stocks Mentioned

Sprint Corporation Stock Quote
Sprint Corporation
S
Corning Incorporated Stock Quote
Corning Incorporated
GLW
$36.65 (3.59%) $1.27
Dillard's, Inc. Stock Quote
Dillard's, Inc.
DDS
$258.60 (8.29%) $19.79
MSA Safety Incorporated Stock Quote
MSA Safety Incorporated
MSA
$126.96 (0.82%) $1.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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