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 fair value.

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. They all seem to share three primary characteristics:

  • Objectivity.
  • Confidence.
  • Patience.

Just understanding these three traits can make you a much better investor. With those qualities firmly in place, you can profit from the market's mispricing.

Seeing what others can't
Last October, when my colleague Philip Durell brought up pharmaceuticals distributor Omnicare (NYSE:OCR), I was dubious. Imagine my reaction when I realized he had recommended Omnicare in his Motley Fool Inside Value newsletter service. Admittedly, the company'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 planned reduction in Medicaid reimbursement rates would hamper the company. Add to that Omnicare's difficulty in completing its planned takeover of rival NeighborCare (NASDAQ:NCRX), and all I could see was a recipe for trouble.

At $29.51, Philip made a compelling argument that Omnicare was worth buying under $33, despite the market's uneasiness. His argument was that the demographic reality of an aging population would trump any short-term troubles, and that as the leading company in the industry, Omnicare would be well-positioned to survive any cuts from Medicaid. Sure enough, just a few months later, Omnicare's stock has come rocketing back, more than tripling the market's return over the same period.

Great Value Investor Trait No. 1: Objectivity.

Staying when others jump
When I first uncovered life insurance company Presidential Life (NASDAQ:PLFE), it closed at $14.05 per share, significantly less than my estimate of its true worth. Shortly thereafter, the company's stock had bottomed out at $12.29, some 12.5% below my discovery price.

Realizing the true value of the firm, I held on through the temporary rough patch. At a recent price of $15.54, to go along with $0.40 of dividends accrued since that low, shareholders (me included) have seen a better than 29% return in about a year since that tumble. In this case, the confident investors were rewarded -- not the investors who panicked and sold near the low, 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. Fast-food giant McDonald's (NYSE:MCD) stumbled in the early part of this decade, at about the time the mad-cow scare hit and competition heated up from the likes of Wendy's (NYSE:WEN). In addition to hitting the Golden Arches hard in terms of menu value, Wendy's also enjoyed a public perception of offering healthier food options. McDonald's had trouble adapting at first -- it responded with a disastrous "made for you" campaign that managed to do little more than slow down service and upset customers.

Yet under the turnaround started by the late Jim Cantalupo, Ronald McDonald and his posse fought back, and shareholders have been rewarded with a very nice recovery -- one that would've been missed by those who grew impatient after the company's early missteps.

Great Value Investor Trait No. 3: Patience.

Putting it all together
Often, a value investor requires all three attributes to be successful. Nowhere is that more evident than when considering the world of tobacco companies. Though Altria (NYSE:MO) and Reynolds American (NYSE:RAI) sport strong balance sheets and enjoy products with high global demand, the nature of their businesses invite both significant litigation and ever-changing regulations. Shifting political winds regularly alter the risks associated with investing in these firms, both real and perceived. While the changing political landscape has opened up significant profitable investment opportunities in these firms, it would have been far too easy for an investor not possessing those three great value traits to get spooked into buying near the highs and selling near the lows.

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. With the right mix of objectivity, confidence, and patience, value investors -- like Philip Durell at Inside Value -- can often profit from the Street's mistakes.

If you're interested in value investing, Philip is offering a special 30-day free trial to Inside Value.Click here to learn more.

This commentary was originally published on Dec. 29, 2004. It has been updated.

Fool contributor and Inside Value team member Chuck Saletta owns shares in Presidential Life and Omnicare. The Motley Fool is investors writing for investors.