Do You Want to Get Rich?

As investors, we share a common goal. We all want to end up with more money than we had when we started. Owning stocks lets us buy small parts of some of the world's greatest businesses and be rewarded by their growth over time.

That concept is pretty straightforward, but as with most things in this world, it comes with complicating factors. By far, the biggest one of those complications is the simple fact that everyone else is trying to do the exact same thing. This poses a problem because every share you buy comes from an investor who's willing to sell it to you. Likewise, every share you sell goes to an investor who's willing to buy it from you. For the most part, those other investors are only willing to buy from you or sell to you if they think the transaction helps them increase their chances of making money.

So what?
In essence, what all this means is that to the person on the other side of your purchase, your cash is worth more than those shares (and vice versa, for your sales). Since you both have what you think are your own best interests in mind when you take the opposite position in any transaction, one of two things must be true.

Either the market reflects the correct price for a company, or one investor or the other ends up on the wrong side of any given trade.

Look here to see just how wide companies' share price swings can be, when compared to the underlying businesses' expected growth rates. Given the magnitude of most of those moves, there's simply no way the market can always be right. When the market doesn't reflect the right price for a company, then one investor is wrong. If you want the stock market to help make you rich, you'd better be sure you're right.

Who's wrong? Who's right?
Of course, both investors think they've got it all figured out and are on the correct side of the transaction. Otherwise, the cash and shares would never change hands. That raises a question: If one of them is wrong, why do they both think they're right?

In truth, it's because an analysis of the value of the company is based on a projection of the future. Nobody knows precisely what will happen next year, much less five or 10 years down the road. Yet it's exactly that type of uncertain forecast that investors use when they make their buy and sell decisions. Therein lies the rub: Many investment decisions are made based on projections that will turn out to be wrong.

This means that, except in those instances where the company is trading exactly at its true value, either the buyer is too optimistic about a company's future or the seller is too pessimistic. This gives you the opportunity to profit. When the sellers are too pessimistic, a company's stock price will fall to well below its true worth. If it falls far enough, then almost anything better than a bankruptcy filing will be viewed as a positive development. If you buy a fundamentally stable company when the stock market starts acting like it won't be around tomorrow, you can profit handsomely. That's exactly the thinking that my Foolish colleague Philip Durell uses in analyzing companies for his market-beating Motley Fool Inside Value investing service.

Accept the market's gifts
Take, for instance, the saga of shopping malls. Back around the turn of this century, the stock market was pricing Internet retailer Amazon.com (NASDAQ:AMZN) as though it would soon destroy traditional shopping (a wildly outrageous projection). At the same time, traditional shopping mall giants were priced as though they were withering on the vine (a wildly pessimistic projection). As the chart below shows, an astute investor who realized that there would always be a market for face-to-face shopping could have bought almost any of the big mall firms and done well.

All values split-adjusted.

In fact, even investors in deeply troubled Mills Corp. have done better than those in Amazon.com since 2000. That's a clear testament to just how out of sync with reality the market can get when excessive optimism and pessimism take over. It also shows how much you can profit from taking the right action when that sort of thing happens.

Get started now
The first step in your quest to beat the market is simply to accept the fact that the market is often wrong. The next step is to figure out where it's wrong right now. Once you recognize where the market's excesses are, all you need to do is make the right moves and wait for the market to realize and correct its mistakes. It's a straightforward strategy that has worked wonders for generations.

At Inside Value, we've been following this plan for two years now. As our results show, the same strategy that has worked for generations still works today. If you'd like to learn just how we do it, there's no better time to start than today. We've recently released the latest issue of Inside Value. In it, we tell you which two companies currently look as though they're priced with the biggest discount to their true worth. Click here to see which ones they are.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta had no direct ownership stake in any of the companies mentioned in this article, but his wife owned shares of General Growth Properties. Amazon.com is a Stock Advisor recommendation. The Fool has adisclosure policy.