Who would give away $50 for two $10s? No one except the Wall Street pros. That's exactly what they do when they overreact to bad news and sell the world's best companies for next to nothing.

It takes three primary characteristics to take advantage of such opportunities:

  • Objectivity
  • Confidence
  • Patience

With those qualities, you can stick it to the Street just as master value investors Warren Buffett, Charlie Munger, and Bill Ruane have done for decades.

See what others don't
A value investor must be objective when determining the true value of a business, regardless of the price the market is quoting to the public.

Motley Fool Inside Value lead analyst Philip Durell recommended GTECH Holdings (NYSE:GTK) to subscribers in May because previous management problems and litigation in Brazil had scared investors. GTECH stock was nearly 50% below its intrinsic value. Philip argued that new management was unleashing the full potential of this cash-rich business, and the market has agreed -- the shares are up more than 40% since May.

Staying when others jump
Value investors must also be confident in being contrary. American Express (NYSE:AXP) was one of many stocks affected by the sell-off following the tragic attacks on Sept. 11, 2001. The stock shed nearly 25% of its value in just two weeks amid fears of economic instability and paralysis. But an investor with the courage of conviction to go against the grain and buy with a long time horizon has realized gains of more than 100%.

Doing the time
When buying companies with a fair value greater than their current market price, value investors must also be willing to wait for the market to catch up. This can take years -- just ask the shareholders of Wal-Mart (NYSE:WMT) or Altria (NYSE:MO). Wal-Mart's stock, though widely recognized as undervalued, has not moved for five years. And after dipping in 2000 because of fears of tobacco litigation, a quick discounted cash flow (DCF) analysis tells me Altria is still almost 25% undervalued -- despite five-year compound annual growth of 36%.

It could also take mere months. Shareholders of Masonite International were rewarded just six months after Philip recommended the company when privately held Kohlberg Kravis Roberts bought it for a 30% premium.

Value investors must also be patient enough to keep companies on a watch list and not jump in until the price is right. The Inside Value list currently includes Fossil (NASDAQ:FOSL), Ceridian (NYSE:CEN), and Intel (NASDAQ:INTC). These are good companies, and I'm confident that with patience, we'll eventually get a bargain.

Putting it all together
The best value investors use objectivity, confidence, and patience to crush the market. At Inside Value, Philip Durell endeavors to do the same for subscribers. In just one year of existence, he is beating the market by 4.3 percentage points. And greater patience brings greater returns. To see the 24 stocks Philip is recommending and the more than 20 stocks he's watching, take a 30-day free trial.

Every once in a while, the folks on Wall Street do odd things -- like offer three tens for a twenty. Be smart and take advantage. Click here to learn more.

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

Fool contributor Chuck Saletta does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors.