Value Plays Aren't Built in a Day

You have to have a well-defined edge to outperform the stock market.

Dumb luck can bail you out over the short term, but some sort of analytical edge is required if your objective is to outperform over the long haul.

A good mantra to embrace borrows from one of my RealMoney columns from five years ago: Give Me an Edge -- Or I Won't Play.

Give me an edge, or I won't play means that I'm not going to play the craps table or pull the lever on slot machines in Las Vegas. I don't have an edge in that environment. So I won't play. Figure out where your analytical edge is and don't stray.

In the stock market, I don't have an edge in predicting short-term price swings. Short-term prices are determined by supply and demand forces. You can see the supply/demand influence when a company like Google(GOOG Quote - Cramer on GOOG - Stock Picks) is added to the S&P 500 index. The supply of Google stock is static while demand increases (index funds have to buy the stock), causing a bump in the price of Google shares.

My edge is in my valuation work.

I can identify companies that are selling at a fraction of their value. On a buy-and-hold basis, for example, 18 of the 20 companies highlighted in my first two Top 10 Turnaround lists have outperformed the S&P 500, and by a wide margin: 169% for the list posted at the end of 2000 vs. -9% for the S&P 500, and 83% for the list posted at the end of 2001 vs. 10% for the S&P 500.

There is a problem with my particular edge, however. The short-term price inefficiency of the market is a two-edged sword. While price inefficiency provides for wonderful opportunities, it doesn't magically go away after a position is taken.

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