As in past crises, the current dislocation in the credit market has spurred a "flight to safety," with investors pulling out of equities and putting their money into safer vehicles. Higher demand for government securities shows that investors are more willing to trade yield for security than they had been -- witness the yield on the 10-year U.S. Treasury bond, which has fallen from 5.15% a year ago to 4.14%.

Clearly, you'd have to be certifiable to increase your exposure to stocks in this market. Or not.

One group of professional investors is doing that -- and far from being crazy, they practice a highly rational approach to investing.

While many panic, others buy
A recent Wall Street Journal article identified a number of smart mutual fund managers who have been buying up stocks:

  • Don Yacktman (The Yacktman Fund)
  • David Winters (Wintergreen)
  • Jean-Marie Eveillard (First Eagle U.S. Value)
  • Bruce Berkowitz (Fairholme)
  • Three of the teams at Marty Whitman's Third Avenue Management.

If you haven't heard of these folks, you should know that they have all achieved exceptional long-term returns, outpacing their peers and their benchmark indexes. They've done so by being first-rate value investors -- and by never overpaying for stocks.

What's more, none of them are frustrated by current market conditions. At a value investing conference at Columbia Business School in February, the mood was as light as you could imagine given that several panels -- Eveillard and Winters were both participants at different times -- focused their discussions on the housing market and the credit crunch.

You might say they're positively joyful
In fact, one panelist suggested that enormous opportunities would result from the financial unwinding now under way. What might those opportunities be?

Let's start by looking at stocks some smart value investors have already bought and that you can buy today ... cheaper:

Stock

Fund/Fund Manager

Shares
Purchased

Stock Price
Range in Q1

Recent
Price

Motorola (NYSE:MOT)

J.-M. Eveillard

40,000

$9.16 - $15.90

$8.99

Valero Energy
(NYSE:VLO)

J.-M. Eveillard

2,210

$46.55 - $69.10

$45.02

WellPoint (NYSE:WLP)

Fairholme Fund

11,015,800

$43.23 - $89.28

$53.03

Liz Claiborne
(NYSE:LIZ)

Bill Miller

2,259,300

$15.99 - $22.57

$16.34

iStar Financial
(NYSE:SFI)

Bill Miller

5,500.000

$13.24 - $26.19

$16.02

Monster Worldwide
(NASDAQ:MNST)

Bill Miller

1,689,400

$23.28 - $31.63

$22.02

Sanofi-Aventis
(NYSE:SNY)

Third Avenue
International Value

125,000

$34.08 - $46.87

$32.56

Sources: Yahoo! Finance, fund manager reports, and GuruFocus.com.

Does this mean you should purchase these stocks immediately? Not so fast: I'd never recommend that anyone buy a stock without understanding the rationale for doing so. Nevertheless, watching what other great investors are buying is a good place to start when looking for investment ideas.

How you can profit in this market
Our short list of stock ideas has another attractive characteristic. Value investors never invest without a margin of safety -- they only buy stocks that are selling at a discount to their estimated intrinsic value. This provides protection against an unexpected deterioration in the fundamentals of the business or an error in evaluating intrinsic value.

So if you can pay less for a stock than the price paid by a successful value investor -- as is the case for the stocks in the table -- you've got yourself a discount on an already discounted price.

Of course, it's never that easy
Two caveats apply here. First, it can be psychologically difficult to purchase a stock that has fallen in price; that amounts to acting in defiance of the negative feedback from the market. Second, purchasing a stock at a discount is only half the battle; selling well is critical, too. Although a value investor's ideal holding period is forever, that may not always make sense in practice. Selling well means being able to continually reassess the value of the stock, which requires judgment and experience.

The team at Motley Fool Inside Value, led by Philip Durell, spends its time hunting for undervalued stocks and following existing recommendations. They're dyed-in-the-wool value investors.

If you're ready to profit from the current market instead of cowering from it, I invite you to take a 30-day free trial of Inside Value -- where you'll discover how fun (and profitable) it is to be contrarian.

This article was first published Feb. 28, 2008. It has been updated.

Alex Dumortier, CFA, started out by imitating value investors in order to become contrarian. He has no beneficial interest in any companies mentioned, but he is a shareholder in the Fairholme Fund and the Third Avenue Real Estate Fund. WellPoint is an Inside Value recommendation. iStar Financial is an Income Investor choice. The Fool has a disclosure policy.