Believe it or not, these are people with college or even graduate-level educations, and they're making bad deals on a regular basis. The place is Wall Street, and the venue is the stock market.
You can work the system
On Wall Street, when news is good, it is very, very good; when it's bad, it's horrendous. And when bad news hits, shareholders can be heard saying, "Give me two twenties, and I'll give you this fifty," often selling companies at significant discounts to their intrinsic values.
Obviously, being on the right side of such deals can be enormously profitable. Many of the greatest investors have made a fortune doing exactly this. I've studied these investors for years -- legends such as Warren Buffett, John Neff, and Bill Miller all seem to share three primary characteristics:
Just understanding these three traits can make you a much better investor. With those qualities firmly in place, value investors can profit from the market's mispricing.
Seeing what others can't
Last August, when my colleague Philip Durell brought up long-distance giant MCI
Admittedly, MCI's shares were trading well below their fair value at the time. Still, I was surprised he would pick such a downtrodden, unloved company. The market obviously shared my concern that the company's recent bankruptcy and shrinking revenues would spell the death of the firm.
At $13.84, Philip made a compelling argument that MCI was worth buying under $20, despite the market's uneasiness. Apparently, Qwest Communications
Great Value Investor Trait No. 1: Objectivity.
Staying when others jump
When I first uncovered title insurance company LandAmerica Financial Group
A confident investor, realizing the true value in the firm, would have held on through the temporary rough patch. LandAmerica recently traded at $55.31. Shareholders have seen a better than 30% return on their investment in under a year, even after that short-term tumble. In this case, the confident investors were rewarded -- not the investors who panicked and sold, losing both their principal and the post-dip upside.
Great Value Investor Trait No. 2: Confidence.
Doing the time
A large part of value investing is buying companies worth more than their current market price and then waiting for something good to happen. Patient investors in Masonite International
And yes -- that's two Motley Fool Inside Value selections in the short life of the service that have been so undervalued that they've been snapped up in acquisitions mere months after their recommendation.
Great Value Investor Trait No. 3: Patience.
Putting it all together
Often, a value investor requires all three attributes to be successful. For example, when I uncovered home builder Lennar
Trying to be objective, I based my valuation estimate on a conservative discounted cash flow analysis of the company. Along the way, interest rate fears, pricing problems in the Las Vegas housing market, and a delay in delivering 600 homes tested my confidence in my analysis. Knowing my estimates to be conservative, however, I managed to soldier forward. Eventually, I determined that the stock still looked like a value in mid-November. Finally, after Lennar reported record earnings, my patience was rewarded. The company's price has risen and now trades much closer to my estimate of its intrinsic value.
Every once in a while, the folks on Wall Street do odd things, like offer three tens for a twenty or accept two twenties for a fifty. Value investors, like my pal Philip Durell, with the right mix of objectivity, confidence, and patience can often profit from the Street's mistakes.
If you're interested in this type of value investing Philip is offering a special 30-day free trial to Motley Fool Inside Value. Click here to learn more.