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:
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
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
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
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
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.