It's simple. My RULE #1 book is there to show you how.
First off, we Rule #1 investors make a list of wonderful companies that have Meaning to us-that is, we find companies that we understand and that have proven, durable competitive advantages (Moats). These Moats ensure their long-term survival and profitability.
We then conservatively estimate each company's future earnings and work backwards to arrive at a fair value.
Because the stock market can be highly volatile in the short run, sometimes it prices companies below their intrinsic value.
To get a 50 percent discount, Rule #1 investors wait patiently for these market fluctuations to bring us wonderful companies at attractive prices.
To use a metaphor, we get a $100,000 Mercedes for $50,000. The key to making money is to sell this Mercedes later at its value-$100,000.
If we wait to buy wonderful companies at attractive prices, we know we're going to make money, because eventually the same market that priced them too low will correct itself and price them at (or above) their actual value. (Nobody's crazy enough to leave a Mercedes worth $100,000 at $50,000 forever!)
This is when we sell and make money.
Buffett has been talking about this for years and a lot of investors out there do it. It isn't hard to do; it just takes patience and the knowledge of calculating value. Anyone can learn.