When your next-door neighbor tells you to get off the sidelines and jump headfirst into the market, you should be wary. When a money manager who's topped the market for close to two decades tells you now is the time to buy, you should listen.

So let's listen in as star fund manager Marty Whitman tells shareholders in two recent letters that now's the time to buy.

Why listen to this guy?
Whitman manages the Third Avenue Value Fund (TAVFX), which has lost approximately 46% over the past year, lagging the S&P by about 8 percentage points.

So, why is he worth listening to? Perhaps because, even including this terrible market, his fund has delivered annualized returns of 11.1% since its inception in 1990, compared to 6.1% for the S&P over the same period.

How? Three things: temperament, temperament, temperament.

The calm amid the storm
In his third-quarter shareholders letter, which came out at the end of July, Whitman said the following:

Admittedly, near-term outlooks are generally poor. But, TAVF focuses not on the near-term outlook, but on buying what is "safe and cheap." I have the unique perspective of being a distressed investor for many decades, and safe and cheap on a long-term basis seems to be about as attractive as it was in the 1970s.

In his fourth-quarter letter, which came out at the end of October, after a soft market turned into a volatile, recessionary bear, he said the following:

Third Avenue wishes it had more liquidity, because then management would have been heavy buyers of high quality equity securities, which are now as cheap as either of us ever remember them being.

Now, most investors aren't so sanguine -- they've pulled, net, nearly $200 billion out of stock mutual funds year to date. So what's so different about Whitman's temperament?

  • He focuses on his investment philosophy and process. Instead of being infected with the market panic, Whitman keeps his eyes on the prize: undervalued companies. This long-term focus helps him remain calm and levelheaded when all around him people are losing their heads.
  • Like famed value investor Warren Buffett, Whitman is not afraid to go against the crowd. Pundits mocked Buffett for avoiding technology stocks in the late 1990s -- but Berkshire Hathaway (NYSE: BRK-A) shareholders are glad he did. While the Nasdaq is still 50% below its all-time high set in March 2000, Berkshire shares have more than tripled during that span.

In fact, Whitman is so confident in his strategy that he said, "You may lose money on your Third Avenue Value Fund investment from here on out; but, if so, it will be because (portfolio manager) Ian (Lapey) and I are stupid."

Cultivating a temperament like Whitman's -- one that focuses on the long term, not the short term, and ignores the crowd in favor of a well-thought-out strategy -- will serve you well.

Where do we go from here?
In his most recent letter, Whitman offered investors some guidelines going forward. He said:

Indeed, today the opportunity of a lifetime seems to be present for passive investors who follow a few simple caveats:

1) Be a buy-and-hold investor;

2) Don't use borrowed funds to invest;

3) Don't own the common stocks of companies which need relatively continual access to capital markets if they are to remain going concerns.

As individual investors, we're in an even better position to put these guidelines to work than Whitman himself. As Third Avenue posted negative returns, shareholders who focused on the short term sold their shares, forcing the fund to sell positions to meet those redemptions -- and locking in losses. Whitman recently sold positions in Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) and decreased his position in Ambac (NYSE: ABK), among others. You, on the other hand, can follow Whitman's temperament example and disregard short-term movements.

That's what he's sold. What has he bought? Whitman's waving his contrarian flag proudly by taking positions in automakers and insurers -- both beaten-up industries. This past quarter, the fund invested in the debt of both General Motors (NYSE: GM) and MBIA (NYSE: MBI) in addition to adding to its long-term position in Toyota (NYSE: TM).

There are a lot of undervalued equities out there right now, even in industries less embattled than automakers and financials. Are you following Whitman's temperament, or are you panicking?

The Foolish bottom line
Marty Whitman isn't stupid -- far from it. And this volatile market hasn't changed his temperament one bit. As he said in the most recent letter, "As far as we are concerned, the Fund's poor 2008 performance is attributable to an irrational stock market, not any fundamental deterioration in the businesses in which TAVF has invested."

In other words, he's not changing his strategy.

Temperament is the difference between investors who consistently outperform the market and investors who get lucky for a while. Here at The Motley Fool, we agree with Whitman (and Buffett) that focusing on buying undervalued stocks for the long term will help you outperform the market.

And we're doing our best Buffett and Whitman impersonations these days. Just last week, the Motley Fool Inside Value team recommended a household name that has grown revenue close to 45% in the past five years but was trading at less than 10 times earnings. They don't expect it to maintain that type of heady growth in the coming quarters, but the business model and long-term prospects suggested the stock price was too enticing to pass up. To find out which stock this is -- and to see what else the Inside Value team is recommending for new money now -- just click here to take a free, 30-day trial. There's no obligation to subscribe.

Keith Beverly owns shares of the Third Avenue Value Fund, but no other company mentioned in this article. Microsoft, Intel, and Berkshire Hathaway are Motley Fool Inside Value choices. Berkshire Hathaway is a Stock Advisor recommendation. Third Avenue Value Fund is a Champion Funds selection. The Motley Fool owns shares of Berkshire Hathaway, as well as shares and covered calls on Intel. The Motley Fool's disclosure policy is cool as a cucumber.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.