(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
(Reuters) – There are two main ways to get paid as a value investor: one is by avoiding the mistakes of your peers, the other is by making some mistakes of your own.
Avoiding other people’s mistakes is all about buying stocks which are cheap but solid and letting the dividends pile up and compound. Buy quality companies which are cheap and you, by definition, miss out on Pets.com, or, dare I say it, Facebook.
In a very real sense, and I’ll explain later, by doing this you are generating a stream of returns based on other money managers’ fear of losing their jobs.
The alternative value strategy is to buy the downtrodden: companies begging to be restructured or even gasping for air.
This can generate big returns but, obviously, means making mistakes, suffering losses and, sometimes, losing your own job.