Although he is not quoted as frequently as master value investor Warren Buffett, value investor Arnold van den Berg's long-term investment returns at Century Management are nearly as impressive.

Since its 1974 inception, the firm has delivered more than 16% annual returns to investors before fees, and nearly 15% annual returns after fees. As Century points out, that means the firm would have doubled your money every 4.8 years.

Four states of being
How has van den Berg done it? Mostly by concentrating on buying stocks that are out of favor with other investors. At a presentation he gave in 2006 (which was transcribed in an excellent issue of Outstanding Investor Digest), he described four psychological states investors experience that he takes advantage of in order to earn those outsized returns.

  • Apathy: The stock price has gone nowhere for a number of years, and people are just tired of it.
  • Disgust: The stock has done nothing; earnings and sales might be down. People might have lost money holding on to it and can't bear to own it any more.
  • Fear and panic: The bad news hits, the company runs into trouble, and the price drops off a cliff. Sell! Sell!
  • Anger: Nothing's gone right while holding it, lost a lot of money, it will never turn around! Just dump this piece of garbage!

Those conditions, especially the last two, lead investors to "buy high, sell low." It's from those same people that Van den Berg buys his stocks. "People, acting as a herd," he said, "do some very foolish things because of emotions that block out reason and intelligence. ... So don't let your emotions dominate."

How to do that
For Van den Berg, the key is paying attention to correct operating metrics -- to value a company and not the stock price. He noted correctly in his 2006 remarks that General Electric (NYSE: GE) in 1981 had dropped more than 32% over the previous eight years, even though its sales, earnings, and dividends all increased substantially. When that happens -- and there's such a disconnect between the performance of a stock and its underlying company -- he says, "The stock price has to shoot up -- like a cork out of a bottle."

That's precisely what happened with GE. The stock returned nearly 20% annually over the subsequent 20 years.

What are some stocks Van den Berg's firm is holding today that have similar potential?


Amount Below 52-Week High

Applied Materials (Nasdaq: AMAT)


DuPont (NYSE: DD)


Pfizer (NYSE: PFE)


Target (NYSE: TGT)


Walgreen (NYSE: WAG)


Walt Disney (NYSE: DIS)


Sources: SEC Filings, Capital IQ. Stock prices current as of May 14.

Now, the simple fact that van den Berg owns these stocks doesn't mean you should go out and buy them for your own portfolio. But what you could do is see which of those four emotional states might have attracted his eye. Was it investor disgust with Pfizer's declining stock price and flat sales? Or maybe it was investor fear after Walgreen's missed earnings last October?

Whatever it was, van den Berg was there.

Who else has learned
As you search the public markets for new stock ideas, keep Van den Berg's four psychological states in mind -- his outstanding long-term performance as a business-focused value investor is something to emulate.

At our Motley Fool Inside Value service, advisor Philip Durell keeps his eye open for situations just like those described above. Of his active recommendations, 20 are trading at discounts of 40% or more to what Philip has calculated as their intrinsic value.

To see the companies he's recommending -- stocks suffering from investor panic or anger that are being bought by smart investors -- click here to join Inside Value free for 30 days. You'll enjoy free and immediate access to all of our stock picks and research.

The quotes above are good, but Jim Mueller still likes a tongue-in-cheek reading of "When in danger or in doubt, run in circles, scream and shout!" He owns shares of Disney, and his wife owns shares of GE, but they don't own any other company mentioned. Pfizer is a recommendation of both Inside Value and Income Investor. Disney is a Stock Advisor choice. The Fool's disclosure policy belongs to the intelligentsia.