Editor's note: Succeeding in investing is no easy feat, as Stansberry's Investment Advisory editor Whitney Tilson knows firsthand. In this article, adapted from a recent issue of the Stansberry Digest Masters Series, Whitney explains why outperforming the market doesn't require complexity. Instead, his straightforward framework can help you strip away the noise and uncover assets that can deliver truly superior investing performance...

It's extremely difficult to achieve superior investing performance over time. Nearly every study out there shows that few investors can do this.

If you want to be one of the few who can beat the odds, my first bit of advice is to keep things super, super simple.

Investing isn't about running big spreadsheets and complex valuation models. The trick is to think sensibly about businesses... project what's likely to happen to them in the next few years... and compare this with other investors' expectations.

There are three possible ways to succeed in investing: be a good stock picker, be a good market timer, and/or use leverage.

I've tried all three... They're all difficult, but from my experience, the second two ways are the hardest. Few people are consistently good at timing the market, and leverage will eventually blow you up.

But many people are capable of finding the occasional undervalued stock – the proverbial 50-cent dollar. Let me explain...

Step 1: Develop a Sound Strategy

The key to becoming a good stock picker is developing a well-articulated, well-defined strategy that differentiates you from the millions of other investors in the market.

There are many ways to do this...

One of them is size. If you're investing with a small pool of capital, you can invest in the nooks and crannies of the market – areas with more inefficiencies.

Time arbitrage is another. The vast majority of money in the world is managed by people who are evaluated on a short-term basis... so investors who can look a year down the line have a big advantage.

Then you can consider concentration. Most professional investors (think index funds and institutional money) are required to be super diversified.

If you invest in 10 stocks and put on the occasional 15% or 20% trade with high conviction, this can be an advantage. But be careful... Excessive concentration can be deadly when you make a mistake.

You can also find an informational edge. This is especially valuable in less-developed markets, which are much less "efficient" than the U.S. market.

Never underestimate the power of "boots on the ground" research, either. You can gather information by talking to friends in a given sector or even walking into a store and speaking with a company's employees.

Even if you can't get more information than others, you can still develop your analytical skills by analyzing the same information better than everyone else.

You'll also gain more experience over your career. As an investor, it takes years – even decades – to develop your instincts... But once you have them, they can be your most valuable edge.

Experience will allow you to develop an emotional edge as well. Human beings are hardwired to be irrational when it comes to financial and investment decisions. If you can keep your emotions in check, you will have a distinct advantage over your competition.

Finally, you can build relationships. Smart investors build and maintain a network of contacts to exchange ideas and information with others and gain valuable insights...

Once you've developed a strategy and know your skills, you need to...

Step 2: Keep Your Stock Analysis Simple and Steady

The first step is determining whether the investment is within your circle of competence.

You need to ask – and correctly answer – whether you truly understand a company and its industry. Do you have an edge, or are you just the proverbial sucker at the poker table?

You don't need a huge circle of competence, but you must understand its boundaries. Straying beyond it is one of the deadliest mistakes you can make.

Then there's company and industry evaluation...

Before you buy a stock, you need to evaluate the underlying business and determine its quality. Careful investors should also take a step back and look at the industry in which a company operates.

And lastly, you need an approach to evaluating management.

Before you invest in a company, ask yourself the following three questions: Are they good operators? Are they good capital allocators? And are they trustworthy and shareholder-friendly?

But finding a company that scores highly on all three metrics doesn't mean it's automatically time to invest...

Most companies that meet these criteria for me also do so for every other investor – which is then reflected in the stock price.

That's why it's critical not to forget the final step...

Step 3: Stay Disciplined – Only Buy When the Price Is Right

The fundamental way to value most assets is discounted cash flow. This simply means estimating the future free cash flows that the asset will generate, then discounting them back to the present.

But there's an even simpler way to think about valuation when it comes to stocks...

Expectations.

Almost every stock price reflects investors' consensus expectations of a company's future.

Sometimes, you can make money buying the stock of a company that investors love – think Netflix (NFLX) or Amazon (AMZN).

This is typically known as growth investing. That means investors pay up for a stock that's eventually offset by a company's high growth rate over time. But numerous studies show that this generally doesn't work out so well. It's difficult for any company to grow at a high rate for an extended period.

For most of my career, I did the opposite: I looked for out-of-favor companies with low investor expectations. That way, any hint of good news would send the stock soaring.

This is classic value investing. The goal is to identify companies facing difficulties that the market thinks are permanent, but instead prove to be fixable.

So if your goal is to develop superior investing performance over time, you must put in the work to find undervalued stocks. And by following these three simple steps, you'll be off to a great start.

Regards,

Whitney Tilson

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