9 Ways to Make Money

Want to succeed as an investor? These strategies will help you find diamonds in the stock-market rough.

By Whitney Tilson, Contributing Editor

John Heins, Contributing Editor

From Kiplinger's Personal Finance magazine, October 2008

"The only source of knowledge is experience," said no less an authority than Albert Einstein. This is certainly true of investing, where your ability to learn from both successes and failures is a key determinant of how successful an investor you'll be.

Thomas Gayner, of Markel Gayner Asset Management, puts it this way: "Having invested since I was a kid, I've lost money every single way it can be lost. The good thing is that by process of elimination, you can figure out how things work and how they don't."

While that sounds straightforward, the learning process for investors can often be complicated by human nature. One of the most basic psychological barriers to drawing useful lessons from our experiences comes from what psychologists call "self-attribution bias." That is, we attribute good outcomes to our own prescience, wisdom and skill, whereas bad outcomes are caused by rotten luck.

So if your investment in cigarette maker Altria doubles, that merely confirms your prescient analysis. But if your Altria stake is cut in half, it occurs because of external factors beyond your control -- overzealous regulators and half-baked juries, for example. If investors don't recognize the true reasons behind good or bad outcomes, they learn little.

In preparation for a seminar that Whitney teaches prior to the Value Investing Congress investment conferences he hosts each May and November, he went through every investment he'd made in his career and grouped them into categories. He made every effort to stick to the facts and avoid selective interpretation of how he'd earned and lost money. He was surprised to find that he'd made money in 18 different types of investments.

Space won't allow us to describe all 18 situations in one column, so we'll discuss half of the money-making opportunities this month and the rest next month.

1. Out-of-favor blue chips. Even the world's greatest companies encounter problems or otherwise fall out of favor. Correctly differentiating between those suffering temporary rather than permanent issues is the key to success here.

McDonald's was a classic out-of-favor blue chip when it fell below $13 in early 2003 (thanks mainly to homegrown missteps). When new management aggressively tackled menu and franchise-relations problems, the company's fortunes turned dramatically and the shares now trade above $65.

An example today is mass retailer Target (symbol TGT), whose shares have fallen from nearly $70 to below $50 over the past year as the U.S. economy and consumer spending have slowed. But the positive fundamentals of the company's business remain intact, and we believe the stock is a good bet to double over the next few years as the economic environment improves.

2. Distressed industries. Buying a good company in a distressed industry is often a great way to make money. It would be hard to find a more distressed area today than financial companies with exposure to U.S. consumer spending, so it's not surprising that the stock of American Express (AXP) has fallen roughly 40% from its 52-week high. This is an extraordinary business, but the company's shares have always been too expensive for most value investors -- until recently. While the company will no doubt face challenges for quite some time, we think the stock provides exceptional value at less than $40.

3. Turnarounds. Turning around a broken business is difficult and often takes much longer than expected -- but when it occurs, a stock can rise many-fold. Our favorite turnaround situation today is Winn-Dixie (WINN), a deeply out-of-favor supermarket chain. Since the company emerged from bankruptcy in 2006, having shed half its stores and nearly all its debt, new management has done all the right things, such as renovating stores. Initially, the stock more than doubled, but weak consumer spending, especially in Florida, where 70% of Winn-Dixie stores are located, caused the stock to drop by more than 50%, to a recent $14. We think the turnaround story is still valid.

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