Find excellent Opportunities That Others Don't See

When asked about his contrarian business style, Las Vegas Sands (NYSE: LVS) CEO Sheldon Adelson, who was once one of the world's 10 richest people, smiled and said, "Everyone has always told me I'm nuts when making investment decisions, but when you can look at something differently than other people, you can find opportunity."

No matter how well a company manages its business, it's bound to encounter bumps in the road. Some of the world's greatest investors, including Warren Buffett, Peter Lynch, Eddie Lampert, and Mohnish Pabrai, have made incredible sums of money by investing in good companies that come across short-term problems. Investors who have the courage to swim against the current when good companies encounter scandals, lawsuits, and other gut-wrenching events can make out quite well once the storm passes and the company returns to business as usual.

Making investment decisions seems pretty easy when everyone agrees with you. Getting a vote of confidence from high-profile analysts, top fund managers, and overconfident CNBC guests can give you a feeling of investment invincibility. But this comes at a price.

The problem with making those easy decisions is, so is everyone else. It's unlikely you'll find much opportunity when stocks have a rosy consensus; the premium prices you'll pay can already reflect any positive developments and leave investors wondering what happened to their road to riches.

Digging for gold where others see fear
Thankfully, just as quickly as investors pile into popular stocks, they can run for the exits en masse when news tarnishing the profile of their once-beloved company develops, giving Foolish investors opportunity where others only see fear. Achieving stellar investment results doesn't come from following the herd: It requires investors to stick their necks out once in a while and accept that the crowd isn't always right.

Now, don't get me wrong, a lot of news truly is bad ... and should scare you. Enron and WorldCom are good examples of once-popular stocks that bit the dust because of jaw-dropping corporate greed and management fraud.

Thus, just because a stock falls on negative news doesn't automatically make it an attractive investment candidate. It's important to realize when a company is undergoing an event that will fundamentally change its business model or cause it to shut down altogether. For instance, whether AIG (NYSE: AIG) survives or fails, it's unlikely to go back to making the highly leveraged bets that caused its problems in the first place.

The types of events that can hurt stocks and lead to profitable opportunities are those frightening -- even profit-losing -- developments that will have a short-term impact but won't affect a company's long-term prospects.

This, too, shall pass
As we've seen, there is a serious nearsightedness problem in the market when it comes to making investment decisions: Even if the consensus is that a company is facing a problem that will only last a short period of time, many often sell anyway, in hopes of buying it back once the future becomes more certain. Investors who are patient and ignore the short-term pessimistic views Mr. Market serves up can be rewarded handsomely in the face of others' fear.

Warren Buffett has achieved incredible investing success buying good companies at bargain prices when they encountered short-term negative events. When describing his 1974 investment in Washington Post, Buffett was quoted as saying, "In the case of the Washington Post, the whole of the company was selling for $80 million. Most analysts would have agreed that the intrinsic value of the assets was around $400 to $500 million. But you could buy little pieces of the business for much less." Buffett was able to profit from the fact that the rest of the market wanted to wait until short-term events had panned out before buying back into the company. When it did, the stock price returned to more reasonable valuations, producing great returns on Buffett's original $10 million investment.

The market is here to serve you, not to guide you
Looking at the big picture while having a reasonable indication of what you think a company is worth is the first step in developing a successful investing mind-set. Don't get too caught up in the noise surrounding a company regarding events that will likely pass in due time.

When good companies encounter painful events, ask yourself some basic questions: Will this hurt the company this year? Probably. Will it affect it next year? Probably not. Is the stock price reflecting next year's potential? Or the next five years? If the answer is no, you might have an opportunity to bypass short-term pessimism and invest in good companies at bargain prices.

The 5 Biggest Stock Market Myths One Should Know

When fiascos like the Enron bankruptcy, auditing scandals and analysts' conflict of interest occur, investor confidence can be at an all-time low. Many investors are wonder whether or not investing in stocks is worth all the hassle. At the same time, however, it's important to keep a realistic view of the stock market. Regardless of the real problems, common myths about the stock market often arise. Here we go over these myths in order to bust them.

1) Investing in stocks is just like gambling.
This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling, we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company.

In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company.

Assessing the value of a company isn't an easy practice. There are so many variables involved that the short-term price movements appear to be random (academics call this the Random Walk Theory); however, over the long term, a company is only worth the present value of the profits it will make. In the short term a company can survive without profits because of the expectations of future earnings, but no company can fool investors forever - eventually a company's stock price can be expected to show the true value of the firm.

Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products that can make our lives better. Don't confuse investing and creating wealth with gambling's zero-sum game.

2) The stock market is an exclusive club in which only brokers and rich people make money.

Many market advisors claim to be able to call the markets' every turn. The fact is that almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate; furthermore, the advent of the internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now there for individuals to use.

Actually, individuals have an advantage over institutional investors because individuals can afford to be long-term oriented. The big money managers are under extreme pressure to get high returns every quarter. Their performance is often so scrutinized that they can't invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook.

3) Fallen angels will all go back up, eventually.
Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt."

Suppose you are looking at two stocks:
XYZ made an all time high last year around $50 but has since fallen to $10 per share.

ABC is a smaller company but has recently gone from $5 to $10 per share.

Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one part of the investing equation (which is different from trading, whch uses technical analysis). The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don't confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.

Below is a chart of Nortel's decline. Imagine how much money you would have lost had you bought Nortel just because it kept on hitting new lows!

4) Stocks that go up must come down.
The laws of physics do not apply in the stock market. There is no gravitational force that pulls stocks back to even. Over ten years ago, Berkshire Hathaway's stock price went from $6,000 to $10,000 per share in a little more than a year. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $70,000 per share over the following six years.

Below is a chart of Wal-Mart from 1997 to 2000. We've circled every time the stock chart hit resistance to reaching a new high. Those investors who were waiting for the stock to come back to earth would missed out on a return of 500% or more. What's behind the stock? It's the company! Wal-Mart is another example of an excellent company that has dominated its industry by being innovative and creating value for both shareholders and customers.

We're not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won't keep on going up.

5) Having just a little knowledge, because it is better than none, is enough to invest in the stock market.
Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It's those investors who really do their homework that succeed.

Don't fret, if you don't have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.

Conclusion
Forgive us for ending with more investing clichés, but there is another old adage that is very much worth repeating: "What's obvious is obviously wrong." This means that knowing a little bit will only have you following the crowd like a lemming. Like anything worth anything, successful investing takes hard work and effort. A partially informed investor is about as effective as a partially informed surgeon; he or she will only hurt themselves and those around them.

Source from: investopedia.com